ASIAN DEVELOPMENT BANK — Annual Report 2012

May 12, 2013

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ASIAN DEVELOPMENT BANK

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Management’s Discussion and Analysis and

Annual Financial Statements

31 December 2012

Asian Development Bank

CONTENTS

Management’s Discussion and Analysis

I.	Overview	Overview	1
II.	Ordinary Capital Resources		1
	A.	Basis of Financial Reporting	1
	B.	Selected Financial Data	2
	C.	Overall Financial Results	2
	D.	Operating Activities	5
		1. Loans	5
		2. Guarantees	8
		3. Syndications	9
		4. Equity Investments	9
	E.	Financing Resources	10
		1. Capital and Reserves	10
		2. Borrowings	11
	F.	Liquidity Portfolio	13
	G.	Contractual Obligations	14
	H.	Risk Management	15
		1. Credit Risk	15
		2. Market Risk	22
		3. Liquidity Risk	23
		4. Operational Risk	24
		5. Capital Adequacy	24
		6. Asset and Liability Management	25
	I.	Internal Control over Financial Reporting	25
	J.	Critical Accounting Policies and Estimates	25
**III. **	Special Funds		26
	A.	Asian Development Fund	26
	B.	Technical Assistance Special Fund	30
	C.	Japan Special Fund	31
	D.	ADB Institute	31
	E.	Pakistan Earthquake Fund	32
	F.	Regional Cooperation and Integration Fund	32
	G.	Climate Change Fund	32
	H.	Asia Pacific Disaster Response Fund	33
**IV. **	Grant Cofinancing		33
Appendix: Ordinary Capital Resources Condensed Management Reporting Balance Sheets			36

Financial Statements, Management’s Report on Internal Control over Financial Reporting, and Independent Auditors’ Reports

I. Ordinary Capital Resources (OCR)

I. Ordinary Capital Resources (OCR)	I. Ordinary Capital Resources (OCR)
Management’s Report on Internal Control over Financial Reporting		39
Independent	Auditors’ Report on Internal Control over Financial Reporting	40
Independent	Auditors’ Report on Financial Statements	42
OCR-1	Balance Sheet, 31 December 2012 and 2011	44
OCR-2	Statement of Income and Expenses for the Years Ended 31 December 2012 and 2011	46
OCR-3	Statement of Comprehensive (Loss) Income for the Years Ended
	31 December 2012 and 2011	47
OCR-4	Statement of Changes in Capital and Reserves for the Years Ended 31 December 2012
	and 2011	48
OCR-5	Statement of Cash Flows for the Years Ended 31 December 2012 and 2011	49
OCR-6	Summary Statement of Loans, 31 December 2012 and 2011	50
OCR-7	Summary Statement of Borrowings, 31 December 2012 and 2011	52
OCR-8	Statement of Subscriptions to Capital Stock and Voting Power, 31 December 2012	54
OCR-9	Notes to Financial Statements, 31 December 2012 and 2011	56

II. Asian Development Fund (ADF)

II. Asian Development Fund (ADF)	II. Asian Development Fund (ADF)
Management’s Report on Internal Control over Financial Reporting		100
Independent	Auditors’ Report on Internal Control over Financial Reporting	101
Independent	Auditors’ Report on Financial Statements	103
ADF-1	Special Purpose Statement of Assets, Liabilities and Fund Balances,
	31 December 2012 and 2011	105
ADF-2	Special Purpose Statement of Revenue and Expenses for the Years Ended
	31 December 2012 and 2011	106
ADF-3	Special Purpose Statement of Comprehensive Income (Loss) for the Years Ended
	31 December 2012 and 2011	107
ADF-4	Special Purpose Statement of Changes in Fund Balances for the Years Ended
	31 December 2012 and 2011	108
ADF-5	Special Purpose Statement of Cash Flows for the Years Ended
	31 December 2012 and 2011	109
ADF-6	Special Purpose Summary Statement of Loans, 31 December 2012 and 2011	110
ADF-7	Special Purpose Statement of Resources, 31 December 2012	112
ADF-8	Notes to Special Purpose Financial Statements, 31 December 2012 and 2011	113

III. Technical Assistance Special Fund (TASF)

III. Technical Assistance Special Fund (TASF)	III. Technical Assistance Special Fund (TASF)
Management’s Report on Internal Control over Financial Reporting		125
Independent	Auditors’ Report on Internal Control over Financial Reporting	126
Independent	Auditors’ Report on Financial Statements	128
TASF-1	Statement of Financial Position, 31 December 2012 and 2011	130
TASF-2	Statement of Activities and Changes in Net Assets for the Years Ended
	31 December 2012 and 2011	131
TASF-3	Statement of Cash Flows for the Years Ended 31 December 2012 and 2011	132
TASF-4	Statement of Resources, 31 December 2012	133
TASF-5	Summary Statement of Technical Assistance Approved and Effective for the Year Ended
	31 December 2012	134
TASF-6	Notes to Financial Statements, 31 December 2012 and 2011	135

IV. Japan Special Fund (JSF)

IV. Japan Special Fund (JSF)	IV. Japan Special Fund (JSF)
Management’s Report on Internal Control over Financial Reporting		142
Independent	Auditors’ Report on Internal Control over Financial Reporting	143
Independent	Auditors’ Report on Financial Statements	145
JSF-1	Statement of Financial Position, 31 December 2012 and 2011	147
JSF-2	Statement of Activities and Changes in Net Assets for the Years Ended
	31 December 2012 and 2011	148
JSF-3	Statement of Cash Flows for the Years Ended 31 December 2012 and 2011	149
JSF-4	Notes to Financial Statements, 31 December 2012 and 2011	150

V. Asian Development Bank Institute (ADBI)

Independent	Auditors’ Report	156
ADBI-1	Statement of Financial Position, 31 December 2012 and 2011	158
ADBI-2	Statement of Activities and Changes in Net Assets for the Years Ended
	31 December 2012 and 2011	159
ADBI-3	Statement of Cash Flows for the Years Ended 31 December 2012 and 2011	160
ADBI-4	Notes to Financial Statements, 31 December 2012 and 2011	161

VI. Pakistan Earthquake Fund (PEF)

VI. Pakistan Earthquake Fund (PEF)	VI. Pakistan Earthquake Fund (PEF)
Management’s Report on Internal Control over Financial Reporting		173
Independent	Auditors’ Report on Internal Control over Financial Reporting	174
Independent	Auditors’ Report on Financial Statements	176
PEF-1	Statement of Financial Position, 31 December 2012 and 2011	178
PEF-2	Statement of Activities and Changes in Net Assets for the Years Ended
	31 December 2012 and 2011	179
PEF-3	Statement of Cash Flows for the Years Ended 31 December 2012 and 2011	180
PEF-4	Notes to Financial Statements, 31 December 2012 and 2011	181
VII. Regional Cooperation and Integration Fund (RCIF)
Management’s Report on Internal Control over Financial Reporting		186
Independent	Auditors’ Report on Internal Control over Financial Reporting	187
Independent	Auditors’ Report on Financial Statements	189
RCIF-1	Statement of Financial Position, 31 December 2012 and 2011	191
RCIF-2	Statement of Activities and Changes in Net Assets for the Years Ended
	31 December 2012 and 2011	192
RCIF-3	Statement of Cash Flows for the Years Ended 31 December 2012 and 2011	193
RCIF-4	Notes to Financial Statements, 31 December 2012 and 2011	194

VIII. Climate Change Fund (CCF)

VIII. Climate Change Fund (CCF)	VIII. Climate Change Fund (CCF)
Management’s Report on Internal Control over Financial Reporting		199
Independent	Auditors’ Report on Internal Control over Financial Reporting	200
Independent	Auditors’ Report on Financial Statements	202
CCF-1	Statement of Financial Position, 31 December 2012 and 2011	204
CCF-2	Statement of Activities and Changes in Net Assets for the Years Ended
	31 December 2012 and 2011	205
CCF-3	Statement of Cash Flows for the Years Ended 31 December 2012 and 2011	206
CCF-4	Notes to Financial Statements, 31 December 2012 and 2011	207

IX. Asia Pacific Disaster Response Fund (APDRF)

IX. Asia Pacific Disaster Response Fund (APDRF)	IX. Asia Pacific Disaster Response Fund (APDRF)
Management’s Report on Internal Control over Financial Reporting		212
Independent	Auditors’ Report on Internal Control over Financial Reporting	213
Independent	Auditors’ Report on Financial Statements	215
APDRF-1	Statement of Financial Position, 31 December 2012 and 2011	217
APDRF-2	Statement of Activities and Changes in Net Assets for the Years Ended
	31 December 2012 and 2011	218
APDRF-3	Statement of Cash Flows for the Years Ended 31 December 2012 and 2011	219
APDRF-4	Notes to Financial Statements, 31 December 2012 and 2011	220

MANAGEMENT’S DISCUSSION AND ANALYSIS

I. OVERVIEW

The Asian Development Bank (ADB) is an international development financial institution whose vision is an Asia and Pacific region free of poverty. ADB was established in 1966 through the Agreement Establishing the Asian Development Bank (the Charter).[1] ADB is owned by 67 members, 48 of which are in the region.

ADB provides various forms of financial assistance to its developing member countries (DMCs). The main instruments are loans, technical assistance (TA), grants, guarantees, and equity investments. These instruments are financed through ordinary capital resources (OCR), Special Funds, and trust funds. ADB operations are financed from OCR and Special Funds. The Charter requires that funds from each resource be kept separate from the others. Trust funds are generally financed by contributions and administered by ADB as the trustee.

ADB also provides policy dialogue and advisory services, and mobilizes financial resources through its cofinancing operations that tap official, commercial, and export credit sources to maximize the development impact of its assistance. Cofinancing for ADB projects can be in the form of external loans, grants for TA and components of loan projects, and credit enhancement products such as guarantees and syndications.

II. ORDINARY CAPITAL RESOURCES

Funding for OCR operations comes from three distinct sources: funds borrowed from capital markets and private placements, paid-in capital provided by shareholders, and accumulated retained income (reserves). The financial strength of ADB is based on the support it has received from its shareholders and on its financial policies and practices. Shareholder support is reflected in the form of capital subscriptions from members and in the record of borrowing members in meeting their debt service obligations.

Borrowed funds, together with equity, are used to fund OCR lending and investment activities and other general operations. Loans are generally provided to DMCs that have attained a higher level of economic development and to nonsovereign borrowers. Sovereign loans are priced on a cost pass-through basis, which means the cost of funding the loans plus a contractual spread is passed to the borrowers. ADB applies market-based pricing for nonsovereign loans. In addition to direct lending, ADB also provides guarantees to assist DMC governments and nonsovereign borrowers in securing commercial funds for ADB-assisted projects.

A. Basis of Financial Reporting

Statutory reporting. ADB prepares OCR financial statements in accordance with accounting principles generally accepted in the United States of America (US GAAP), referred to in this document as the “statutory reporting basis.”

ADB manages its balance sheet by selectively using derivatives to minimize interest rate and currency risks associated with its financial instruments. Derivatives are used to enhance asset and liability management of individual positions and overall portfolios. ADB has elected not to define any qualifying hedging relationships, not because economic hedges do not exist, but rather because the application of hedging criteria under the US GAAP does not make fully evident ADB’s risk management strategies.

1 ADB. 1966. Agreement Establishing the Asian Development Bank . Manila.

2

ADB reports all derivative instruments on the balance sheet at fair value and recognizes the changes in fair value for the period as part of net income. ADB also elects to measure financial instruments at fair value on a selective basis and opts to measure borrowings with associated swaps at fair value to apply a consistent accounting treatment between the borrowings and their related swaps. ADB continues to report its loans and borrowings that are not swapped at amortized cost and reports most of its investments (except time deposits that are recorded at cost) at fair value.

Management reporting. Since certain financial instruments (including all derivatives, swapped borrowings, and certain investments) are recorded at their fair value, while loans and a portion of borrowings and investments are recorded at amortized cost, Management believes that statutory income may not fully reflect the overall economic value of ADB’s financial position because of the asymmetric accounting treatment. Accordingly, ADB also reports operating income, which excludes the impact of the fair value adjustments associated with financial instruments from the results of OCR operations. ADB uses operating income as the key measure to manage its financial position, make financial management decisions, and monitor financial ratios and parameters.

Operating income does not include unrealized gains or losses of the portfolio. The unrealized gains or losses, although an important indicator of the portfolio performance, generally represent changes in income as a result of fluctuations in the fair value of swapped borrowings and derivatives. Since ADB does not actively trade these financial instruments, such gains or losses are generally not realized unless ADB is forced to do so by risk events before maturity. ADB has instituted conservative risk management policies to mitigate such risks.

Since ADB intends to hold most borrowings and related swaps until maturity or call, the interim unrealized gains and losses reported under the statutory reporting basis will eventually converge with the net realized income and expenses ADB recognizes over the life of the transaction.

The management reporting basis balance sheet reconciled from the statutory reporting basis balance sheet as of 31 December 2012 can be found in the Appendix.

B. Selected Financial Data

Table 1 presents selected financial data on two bases: statutory reporting basis and management reporting basis. The rates of return on equity and investments were generally lower in 2012, compared to returns in recent years, reflecting the market trend (Table 2). A discussion on revenue and expenses is in the Overall Financial Results section.

C. Overall Financial Results

Net income. Table 3 presents overall financial results in 2012. Net income for the year was $142.5 million compared with $609.5 million for 2011. The decrease in net income was mainly attributable to a $336.6 million reduction in fair value of some of ADB’s derivatives and associated borrowings and a $121.9 million decrease in operating income.

ADB MANAGEMENT’S DISCUSSION AND ANALYSIS: 31 DECEMBER 2012

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Table 1: Selected Financial Data for the Year Ended 31 December

($ million)

Item	2012 2011 2010 2009 2008
Statutory Reporting Basis Revenue From Loans From Investments From Guarantees From Equity Investments From Other Sources Total Revenue Borrowings and Related Expenses Administrative Expensesa Provision for (Write Back on) Loan Losses Other Expenses Total Expenses Net Realized Gains (Losses) Net Unrealized (Losses) Gains Net Income (Loss) Average Earning Assetsb Annual Return on Average Earning Assets (%) Return on Equity (%) Return on Loans (%) Return on Investments (%) Cost of Borrowings(%)	770.5 649.6 680.5 959.8 1,358.0 390.2 365.3 367.5 459.4 677.2 18.4 15.7 11.3 9.2 6.9 38.5 44.0 58.4 24.5 3.7 20.5 20.5 24.2 18.6 18.7
	1,238.1 1,095.1 1,141.9 1,471.5 2,064.5
	520.4 367.9 386.0 741.7 1,208.4 351.1 315.9 294.3 193.6 141.0 6.9 (7.4) (44.7) 115.8 (3.5) 8.7 5.0 3.5 5.1 14.7
	887.1 681.4 639.1 1,056.2 1,360.6
	122.4 190.1 80.3 23.3 (28.1) (330.9) 5.7 42.7 (466.2) 450.6
	142.5 609.5 625.8 (27.5) 1,126.3 76,361.0 69,111.9 62,444.5 54,655.0 50,394.0 0.19 0.88 1.00 (0.05) 2.24 0.87 3.74 3.97 (0.18) 7.65 1.56 1.34 1.61 2.67 3.84 1.69 2.04 2.17 2.93 3.20 0.91 1.13 2.06 2.91 4.11
Management Reporting Basis Operating Incomec Average Earning Assetsb Annual Return on Average Earning Assetsd(%) Return on Equity (%) Return on Loans (%) Return on Investments (%) Cost of Borrowings(%)	464.7 586.6 548.0 420.1 699.8 76,386.4 69,098.6 62,555.4 54,828.0 50,443.0 0.61 0.85 0.88 0.77 1.39 2.72 3.58 3.54 2.84 4.82 1.51 1.36 1.56 2.55 4.14 1.58 2.11 2.16 2.87 3.70 0.84 0.69 0.81 1.83 3.29

( ) = negative.

a Net of administrative expenses allocated to the Asian Development Fund and loan origination costs that are deferred. b Composed of investments and related sw aps, outstanding loans (excluding net unamortized loan origination cost and/or front-end fees) and related sw aps and equity investments.

c Operating income is defined as statutory net income before unrealized gains and/or losses on fair value changes of borrow ings and derivatives and ADB’s proportionate share in unrealized gains and/or losses from equity investment accounted under equity method.

d Represents operating income over average earning assets.

Table 2: Selected US Dollar Interest Rates

	(%)
Item	2012	2011	2010	2009	2008
6-Month US Dollar LIBOR	0.51	0.81	0.46	0.43	1.75
3-Year US Dollar SwapRate	0.50	0.82	1.28	2.06	1.75
LIBOR = London interbank offered rate, US = United States.
Source: Bloomberg Finance L.P.

ADB MANAGEMENT’S DISCUSSION AND ANALYSIS: 31 DECEMBER 2012

4

Table 3: Overall Financial Results for the Year Ended 31 December

($ million)

($million)
Item	2012 2011 Change
Income from loans 763.6 657.0 106.6 Interest income 766.0 664.3 101.7 (Provision) Write back of loan losses (6.9) 7.4 (14.3) Others 4.5 (14.7) 19.2 Income from investments 407.0 449.6 (42.6) Interest income 390.2 365.3 24.9 Realized gain 16.8 84.3 (67.5) Income from equity investments 109.1 146.8 (37.7) Profit on sale 89.7 122.7 (33.0) Realized gain on proportionate share of income from EI accounted under the equity method 24.9 11.8 13.1 Impairment loss (9.9) (2.1) (7.8) Dividend income 4.4 14.1 (9.7) Others 0.0 0.3 (0.3) Other income—net 40.3 11.5 28.8 Borrowings and related expenses 504.2 362.4 141.8 Interest and other expenses 520.4 367.9 152.5 Realized gain (16.2) (5.5) (10.7) Administrative expenses—OCR 351.1 315.9 35.2 Operating income 464.7 586.6 (121.9) Net unrealized (losses) gains (330.9) 5.7 (336.6) Net unrealized gains on proportionate share of income from EI accounted under the equity method 8.7 17.2 (8.5) Net income 142.5 609.5 (467.0)	763.6 657.0 106.6 766.0 664.3 101.7 (6.9) 7.4 (14.3) 4.5 (14.7) 19.2 407.0 449.6 (42.6) 390.2 365.3 24.9 16.8 84.3 (67.5) 109.1 146.8 (37.7) 89.7 122.7 (33.0) 24.9 11.8 13.1 (9.9) (2.1) (7.8) 4.4 14.1 (9.7) 0.0 0.3 (0.3) 40.3 11.5 28.8 504.2 362.4 141.8 520.4 367.9 152.5 (16.2) (5.5) (10.7) 351.1 315.9 35.2
	142.5 609.5 (467.0)

( ) = negative, EI = equity investments, OCR = ordinary capital resources. Note: 0.0 = amount less than $0.05 million.

Operating income. Operating income[2] for 2012 was $464.7 million compared with $586.6 million for 2011. The decrease in operating income was because of the following:

• $141.8 million increase in overall borrowings and related expenses resulting from the increased cost and size of borrowings;

• $42.6 million decrease in overall investment income mainly because 2011 income included one-time realized gains from liquidating some investment securities;

• $37.7 million decrease in income from equity investments primarily because of a $33.0 million decrease in profit on the divestment of shares in publicly traded companies; and

• $35.2 million increase in administrative expenses.

• These were partially offset by the following:

• $106.6 million increase in overall loan income primarily because of a $101.7 million increase in interest income due to the increase in size of the loans outstanding portfolio and increase in return from loans; and

• $28.8 million increase in other income mainly due to 2011 other income included $19.8 million impairment loss from debt securities held under nonsovereign operations.

2 Operating income is defined as statutory net income before unrealized gains (or losses) on fair value changes of borrowings and derivatives, and ADB’s proportionate share in unrealized gains (or losses) from equity investment accounted under the equity method.

ADB MANAGEMENT’S DISCUSSION AND ANALYSIS: 31 DECEMBER 2012

5

Net unrealized gains and losses. During 2012, ADB posted a net unrealized loss of $330.9 million (2011: $5.7 million net unrealized gain). This primarily consists of fair value adjustments on the swapped borrowings and derivatives used for hedging borrowings, investments, and loan transactions. The change in fair value of borrowings and related swaps resulted in a net unrealized loss of $380.6 million (2011: $30.2 million net unrealized gain). The fair value adjustments may change due to the movements in yield curves and ADB’s credit spread. For 2012, the change included the impact of decrease in the fair value of swaps resulting from enhancement of the swap valuation methodology.

D. Operating Activities

ADB provides financial assistance through loans, TA, guarantees, and equity investments to its DMCs to help them meet their developmental needs. ADB also promotes cofinancing of its projects and programs to complement its own assistance with funds from both official and commercial sources, including export credit agencies.

1.

Loans

Loans based on the London interbank offered rate (LIBOR) have been the primary lending facility for OCR sovereign operations since 2001. The LIBOR-based loan (LBL) is designed to meet borrowers’ demand for loan products that suit project needs and effectively manage their external debt. The LBL also gives borrowers a high degree of flexibility in managing interest rate and exchange rate risks, while providing low intermediation risk to ADB. Since November 2002, ADB has been offering local currency loans to nonsovereign borrowers; in August 2005, this was expanded to sovereign borrowers. In June 2009, ADB established the Countercyclical Support Facility (CSF) in response to the global economic crisis that spread to Asia and the Pacific. The CSF is a sovereign lending instrument available to support the countercyclical development expenditure and/or policy program of DMCs.

Effective 14 October 2011, ADB introduced policy-based lending, which enhanced the program lending policy by mainstreaming the programmatic budget support and enhancing the crisis response capacity. ADB has four policy-based lending products, each catering to a different situation in a DMC: (i) Stand-Alone Policy-Based Lending; (ii) Programmatic Approach; (iii) Special Policy-Based Lending; and (iv) Countercyclical Support Facility Lending.

Before 2001, ADB’s loan products consisted of the pool-based single currency loan, the marketbased loan, and fixed-rate multicurrency loans. With the introduction of the LBLs, these are no longer offered.

Loan approvals, disbursements, repayments, and prepayments. In 2012, total loans approved were $9.4 billion, representing a $1.3 billion decrease from 2011 ($10.7 billion). ADB approved 50 sovereign loans totaling $8.3 billion and 23 nonsovereign loans totaling $1.1 billion, compared with 2011 approvals of 60 sovereign loans totaling $9.1 billion and 15 nonsovereign loans totaling $1.6 billion. Disbursements in 2012 totaled $6.8 billion ($6.2 billion for sovereign loans and $0.6 billion for nonsovereign loans), an increase of 6.7% from the $6.3 billion disbursements in 2011. Regular principal repayments in 2012 were $3.2 billion (2011: $2.7 billion), while prepayments totaled $61.3 million (2011: $104.7 million). In 2012, three loans were fully prepaid for $17.8 million, and seven loans were partially prepaid for $43.5 million. As of 31 December 2012, loans outstanding after allowance for loan losses and net unamortized loan origination cost totaled $52.8 billion, of which $49.9 billion were sovereign loans and $2.9 billion were nonsovereign loans.

ADB MANAGEMENT’S DISCUSSION AND ANALYSIS: 31 DECEMBER 2012

6

ADB offers the multitranche financing facility (MFF), a debt financing facility that delivers financial resources for a program or investment in a series of separate financing tranches over a fixed period. Financing tranches may be provided as loans, guarantees, or any combination of these instruments based on periodic financing requests submitted by the borrower. In 2012, six MFFs totaling $2.6 billion (2011: 12 MFFs totaling $4.8 billion) were approved under OCR. Periodic financing requests under MFFs totaling $3.3 billion were approved in 2012 (2011: $3.7 billion).

ADB provides lending without sovereign guarantee to entities that can be considered public sector borrowers but are structurally separate from the sovereign or central government. Such entities include state-owned enterprises, government agencies, municipalities, and local government units. Two loans to state-owned enterprises without sovereign guarantee totaling $44 million were approved in 2012 (2011: $600 million).

Status of Loans. One nonsovereign loan with an outstanding principal balance of $18.4 million was in nonaccrual status as of 31 December 2012 (one nonsovereign loan totaling $22.8 million as of 31 December 2011).

Loan charges on sovereign loans. LBLs and loans approved under the CSF carry a floating lending rate that consists of a funding cost margin over or under the 6-month LIBOR and an effective contractual spread. The lending rate is reset every 6 months on each interest reset date and can be converted into a fixed rate at a borrower’s request. The lending rates for poolbased single currency loans are based on the previous semester’s average cost of borrowing. Interest rates for market-based loans are either fixed or floating. The floating rates are determined based on 6-month LIBOR with reset dates of either 15 March and 15 September or 15 June and 15 December.

A commitment charge is levied on undisbursed balances of all project and policy-based loans, beginning 60 days after the applicable loan agreement is signed and the charge starts to accrue when the loan becomes effective.

Lending spread. Effective 2000, all sovereign loans without specific provisions in the loan agreements were charged a lending spread of 60 basis points over the base lending rate. Since 2004, 20 basis points of the lending spread were waived on borrowers or guarantors under ADB’s sovereign operations that do not have OCR loans in arrears. Subsequently, the waiver policy was extended to cover the period up to December 2013 for applicable loans.

In December 2007, the Board of Directors revised the pricing structure for all LBLs and local currency loans (LCLs) negotiated on or after 1 October 2007 by providing a credit of 0.4% for the duration of the loan. This resulted in an effective contractual spread of 20 basis points over the base lending rate. In addition, the waiver mechanism was eliminated for all loans negotiated on or after 1 October 2007.

In April 2010, the Board revised the loan charges where for all LBLs and LCLs (i) negotiated from 1 July 2010 up to and including 30 June 2011 that the credit of 0.4% be reduced to 0.3% for the duration of the loan, to result in a contractual spread of 0.30% over the base lending rate; and (ii) negotiated from 1 July 2011, that the credit of 0.4% be reduced to 0.2% for the duration of the loan, to result in a contractual spread of 0.4% over the base lending rate.

The loans approved under the CSF carry a lending spread of 200 basis points over the base lending rate and is not subject to waiver.

ADB MANAGEMENT’S DISCUSSION AND ANALYSIS: 31 DECEMBER 2012

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Maturity premium. In December 2011, the Board approved the introduction of maturity premiums for all LBLs and LCLs for which formal loan negotiations were completed on or after 1 April 2012:

• (i) 10 basis points per annum on loans with an average loan maturity of greater than 13 years and up to 16 years, and

• (ii) 20 basis points per annum on loans with an average maturity of greater than 16 years and up to 19 years.

ADB also introduced a limit on the average maturity for new loans to not exceed 19 years. As of 31 December 2012, 29 project loans totaling to $4.5 billion were subject to maturity premium.

Rebates and surcharges . To maintain the principle of cost pass-through pricing policy, ADB returns the actual funding cost margin above or below LIBOR to its borrowers through a surcharge or rebate. The funding cost margins are reset on 1 January and 1 July every year, and are based on the actual average funding cost margin for the preceding 6 months. The rebates or surcharges are passed on to borrowers by incorporating them into the interest rate for the succeeding interest period. ADB returned an actual sub-LIBOR funding cost margin of $76.6 million to its LBL borrowers in 2012 (2011: $81.5 million) based on the rebate rates, and collected a surcharge of $4.5 million on CSF loans in 2012 (2011: $4.5 million).

Table 4: Funding Cost Margin

	Table 4: Funding Cost Margin
	(%peryear)
Type	(Rebate)or Surcharge
	1 July2012 1 January2012 1 July2011 1 January2011
LIBOR-based Loans US dollar yen CSF Loans – US dollar	(0.19) (0.19) (0.21) (0.23) (0.29) (0.28) (0.27) (0.27) 0.18 0.18 0.18 0.18

( ) = negative, CSF = Countercylical Support Facility, LIBOR = London interbank offered rate, US = United States.

The lending rates for pool-based single currency loans (PSCLs) are based on the previous semester’s average cost of borrowing. PSCLs carry a lending spread of 60 basis points over the base lending rate.

		Table	5: Lending Ratesa
			(%peryear)
		2012	2011	PSCLs
1	January	4.40	4.11	US dollar
		1.70	1.53	yen
1	July	4.73	4.19	US dollar
		1.66	1.53	yen

PSCL = pool-based single currency loan, US = United States.

a Lending rates are set on 1 January and 1 July every year and are valid for 6 months and are represented net of 20 basis points lending spread w aiver.

Interest rates for market-based loans are either fixed or floating. The floating rates are determined based on 6-month LIBOR with reset dates of either 15 March and 15 September or 15 June and 15 December. Market-based loans carry a lending spread of 40 or 60 basis points.

ADB MANAGEMENT’S DISCUSSION AND ANALYSIS: 31 DECEMBER 2012

8

Commitment charge. ADB borrowers are charged commitment fees on the undisbursed loan balances for sovereign LBLs. The charges differ depending on when the loan was negotiated (Table 6).

Table 6: Commitment Fees

(% per year)

(%peryear)
			Policy-based
Date	Project loans		loans
Negotiated before 1 January 2007, with
undisbursed balance as of 1 January 2007	0.75	a	0.75
Waiver	n/a		(0.50)	b
Net	0.75		0.25
Negotiated after 1 January 2007	0.35		0.75
Waiver	(0.10)	b	(0.50)	b
Net	0.25		0.25
Negotiated on or after 1 October 2007	0.15		0.15	c

( ) = negative, n/a = not applicable.

a Progressive.

b Applicable to all interest periods from 1 January 2007 to 31 December 2013.

c Countercyclical support facility loans are levied a flat commitment fee of 0.75%.

Loan charges on nonsovereign loans. For nonsovereign loans, ADB applies market-based pricing to determine the lending spread, front-end fees, and commitment charges for each loan. The lending spread is intended to cover ADB’s risk exposure to specific borrowers and projects and the front-end fee to cover the administrative costs incurred in loan origination. Front-end fees typically range from 1% to 1.5% depending on the transaction. ADB applies a commitment fee typically in the range of 0.50% to 0.75% per year on the undisbursed commitment.

Local currency loans are priced based on relevant local funding benchmarks or ADB’s funding costs and a market-based spread.

Official cofinancing for loans. In 2012, $1,744.5 million from official sources was mobilized in loan cofinancing for 20 loan projects, of which $267.0 million is under ADB’s administration and $1,477.5 million is under collaborative arrangements (Refer to Note E of OCR Financial Statement for loans administered by ADB as of 31 December 2012).

2. Guarantees

Guarantees are typically designed to facilitate cofinancing by mitigating the risk exposure of commercial lenders and capital market investors. ADB provides guarantees as credit enhancements for eligible projects to cover risks that the project and its commercial cofinancing partners cannot easily absorb or manage on their own. ADB also provides political risk guarantees to cover specifically defined political risks. Reducing these risks can make a significant difference in mobilizing debt funding for projects. ADB has used its guarantee instruments successfully for infrastructure projects, financial institutions, capital markets, and trade finance. These instruments generally are not recognized in the balance sheet and have off-balance sheet risks. For guarantees issued and modified after 31 December 2002, ADB recognized at the inception of a guarantee the noncontingent aspect of its obligations. In 2012, ADB approved two new guarantees totaling $403 million (2011: four guarantees totaling $416.6 million).

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Trade Finance Program. The Trade Finance Program, which started operations in 2004, consists of three products: (i) a credit guarantee facility, under which ADB issues guarantees to participating international and regional banks to guarantee payment obligations issued by an approved DMC and/or local banks in selected DMCs; (ii) a revolving credit facility, under which ADB provides trade-related loans to DMC banks in support of DMC companies’ export and import activities; and (iii) a risk participation agreement, under which ADB shares risk with international banks to support and expand trade in challenging and frontier markets. The credit guarantee and risk participation agreement are unfunded products, while the revolving credit facility is funded.

In 2012, 49 issuing banks in 14 countries availed of ADB’s standby letter of credit (credit guarantee facility) amounting to $1,936.2 million (2011: $1,093.6 million), 4 major banks availed of the risk participation agreement amounting to $291.0 million (2011: $501.0 million), and 2 issuing banks availed of the revolving credit facility amounting to $21.0 million (2011: $35.5 million). ADB also transferred a portion of its risk in credit guarantee facility amounting to $673.6 million (2011: $487.6 million) to three financial institutions.

As of 31 December 2012, outstanding Trade Finance Program loans amounted to $5.0 million (2011: $8.8 million) and guarantees amounted to $554.4 million (2011: $579.2 million).

Supply Chain Finance Program. In 2012, ADB approved the Supply Chain Finance Program totaling $200.0 million to provide guarantees and loans (both without government guarantee) through partner financial institutions to support payments to suppliers and distributors of goods in DMCs. There was no outstanding amount as of 31 December 2012.

3. Syndications

Syndications enable ADB to mobilize cofinancing by transferring some or all of the risks associated with its loans and guarantees to other financing partners.[3] Thus, syndications decrease and diversify the risk profile of ADB’s financing portfolio. Syndications may be on a funded or unfunded basis, and they may be arranged on an individual, portfolio, or any other basis consistent with industry practices. In 2012, $200.0 million of B-loans[4] was provided for two projects (2011: $200 million for two projects).

4. Equity Investments

The Charter allows the use of OCR for equity investments in private enterprises up to 10% of its unimpaired paid-in capital actually paid up together with reserves and surplus, excluding special reserves. At the end of 2012, the total equity investment portfolio for OCR for both outstanding and undisbursed approved facilities totaled $1,348.1 million, or about 84% of the ceiling defined by the Charter.

In 2012, ADB approved three equity investments totaling $131.0 million (2011: six equity investments totaling $239.0 million). In the same period, ADB disbursed a total of $112.4 million in equity investments, a 46.5% increase from the $76.7 million disbursed in 2011, and received a total of $232.5 million from capital distributions and divestments, whether in full or in part, in 34 projects. The divestments were carried out in a manner consistent with good business practices, after ADB’s development role in its investments had been fulfilled, and without destabilizing the companies concerned.

3 Depending on whether ADB retains risk or not, ADB may or may not have a contingent liability. 4 A B-loan is a tranche of a direct loan nominally advanced by ADB, subject to eligible financial institutions’ taking funded risk participations within such a tranche and without recourse to ADB. It complements an A-loan funded by ADB. The B-loans approved in 2012 include $100 million of local currency complementary loans.

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E. Financing Resources

1. Capital and Reserves

The total authorized capital of ADB was 10,638,933 shares valued at $163.5 billion as of 31 December 2012. Subscribed capital as of 31 December 2012 was 10,614,017 shares valued at $163.1 billion. Of the subscribed capital, $8.2 billion was paid-in ($5.3 billion of which was paid as of 31 December 2012) and $154.9 billion was callable. Callable capital can be called only if required to meet ADB’s obligations incurred on borrowings or guarantees under OCR. No call has ever been made on ADB’s callable capital.

The fifth general capital increase (GCI V) was concluded in January 2012 with subscriptions representing 99.6% of the authorized shares. As of 31 December 2012, GCI V subscribed shares were valued at $108.6 billion.

In accordance with Article 40 of the Charter, the Board of Governors annually approves the allocation of the previous year’s net income to reserves and/or surplus. In addition, to the extent feasible, it approves the transfer of part of net income to Special Funds to support development activities in its DMCs. In May 2012, the Board of Governors approved the allocation of 2011 net income of $593.7 million, after appropriation of guarantee fees to special reserve, as follows: (i) $6.3 million be added from Loan Loss Reserve; (ii) $22.9 million representing Financial Accounting Standards Board’s Accounting Standards Codification (ASC) 815 and 825 adjustments and the unrealized portion of net income from equity investments accounted under equity method, to Cumulative Revaluation Adjustments account; (iii) $417.1 million to Ordinary Reserve; (iv) $120.0 million to Asian Development Fund (ADF); and (v) $40.0 million to Technical Assistance Special Fund (TASF).

The Asian Tsunami Fund (ATF) was terminated on 31 December 2010, and all projects were financially completed as of 31 December 2011. In December 2012, the remaining unutilized amount of ATF totaling $6.8 million was returned to OCR.

Total shareholders’ equity decreased from $16,533.5 million as of 31 December 2011 to $16,420.0 million as of 31 December 2012. This was because of (i) the net increase in other comprehensive losses of $376.5 million; (ii) the net effect of the unfavorable change in the value of the special drawing right (SDR) on capital and reserves of $116.6 million; and (iii) allocations to Special Funds totaling $160 million ($120 million to the ADF, and $40 million to the TASF). The decreases were offset mainly by (i) the $390.3 million increase in paid-in capital for the installment payments, net of $211.9 million demand obligations received during the year; (ii) the net income for the year of $142.5 million, before appropriation to special reserve of $18.4 million guarantee fees; and (iii) the return of resources from the ATF of $6.8 million.

ADB limits the total amount of outstanding loans and guarantees, as well as outstanding equity investments including undisbursed commitments, to the total amount of ADB’s unimpaired subscribed capital, reserves, and surplus. In addition, gross outstanding borrowings cannot exceed the sum of callable capital from nonborrowing members, paid-in capital, and reserves (including surplus). As of 31 December 2012, headroom for lending was $120.7 billion ($123.3 billion as of 31 December 2011) and for borrowings was $53.4 billion ($57.9 billion as of 31 December 2011).

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2. Borrowings

ADB’s primary borrowing objective is to ensure the availability of funds at the most stable and lowest possible cost for its operations. Subject to this objective, ADB seeks to diversify its funding sources across markets, instruments, and maturities. In 2012, ADB continued to employ a strategy of issuing liquid benchmark bonds to maintain its strong presence in key currency bond markets, and raising funds through opportunistic financing and private placements, such as retail-targeted transactions and structured notes, which provide ADB with cost-efficient funding levels.

Summary of 2012 funding operations. In 2012, ADB completed 77 borrowing transactions, raising about $13.2 billion in long- and medium-term funds (2011: $14.0 billion). The new borrowings were raised in eight currencies: Australian dollar, Brazilian real, New Zealand dollar, Norwegian krone, pound sterling, South African rand, Turkish lira, and US dollar. Of the 2012 borrowings, $9.0 billion was raised through 17 public offerings, including three global benchmark bond issues denominated in US dollars totaling $5.25 billion. The remaining $4.2 billion was raised through 60 private placements. The average maturity of these borrowings was 4.6 years (2011: 4.6 years). All of the 2012 borrowings were swapped into US dollar floatingrate liabilities.

ADB also raised $5.7 billion in short-term funds under its Euro-Commercial Paper Program (ECP), an increase over the $621 million issued in 2011. This increase reflects a strategic approach taken by ADB to accommodate demand from investors for ADB’s short-term issuance and at the same time broaden its presence in the ECP market. Of the ECPs issued in 2012, $1.8 billion remained outstanding as of 31 December 2012. Table 7 shows details of 2012 borrowings as compared with 2011 borrowings.

In 2012, ADB tapped the Australian dollar market with A$2.4 billion bond issues (about $2.5 billion equivalent) which included ADB’s first Australian dollar floating rate note under its Australian Dollar Domestic Medium Term Note Programme. ADB also continued to issue thematic bonds of about $263 million in water bonds and $343 million in clean energy bonds, bringing the cumulative thematic bonds issuance to date to about $1.5 billion equivalent. In addition, ADB completed buyback transactions with a total notional amount of about $129.7 million in 2012.

ADB continues to pursue its objective to contribute to the development of local bond markets and to provide the appropriate local currency financing for its borrowers. In 2012, ADB approved one guarantee denominated in Indian rupees.

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Table 7: Borrowings

($ million)

Item	2012	2011
Long Term
Total Principal Amount	13,217.4	14,008.8
Average Maturity to First Call (years)	4.6	4.6
Average Final Maturity (years)	7.1	6.8
Number of Transactions
Public Offerings	17	16
Private Placements	60	52
Number of Currencies (before swaps)
Public Offerings	6	6
Private Placements	6	7
Short Terma
Total Principal Amountb	5,683.8	620.6
Number of Transactions	36	8
Number of Currencies	4	2
aAll euro commercial papers.
bAt year-end, the outstanding principal amount w as $1,849.3 million in 2012 ($437.6		million in 2011).

Use of derivatives. ADB undertakes currency and interest rate swaps to raise, on a fully hedged basis, currencies needed for operations in a cost-efficient way, while maintaining its borrowing presence in major capital markets. Figures 1 and 2 show the effects of swaps on the currency composition and interest rate structure of ADB’s outstanding borrowings as of 31 December 2012. Interest rate swaps are also used for asset and liability management purposes to match the liabilities with the interest rate characteristics of loans.

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Figure 1: Effect of Swaps on Currency Composition of Borrowings
As of 31 December 2012
Currency Composition of Currency Composition of
Outstanding Borrowings Outstanding Borrowings
(Before Swaps) (After Swaps)
Other
Currencies [b]
Yen
Other 5.0% 1.5%
Currencies [a]
19.9%
Yen
5.1%
US dollar
58.2%
Australian
dollar
US dollar
16.8%
93.5%
----- End of picture text -----

a Other currencies include Brazilian real, Canadian dollar, yuan, Indian rupee, ringgit, Mexican peso, New Zealand dollar, Norwegian krone, pound sterling, South African rand, Swiss franc, baht, and Turkish lira. b Other currencies include yuan, Indian rupee, and Swiss franc.

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Figure 2: Effect of Swaps on Interest Rate Structures of Borrowings As of 31 December 2012

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Interest Rate Structure of Interest Rate Structure of
Outstanding Borrowings Outstanding Borrowings
(Before Swaps) (After Swaps)
Variable Fixed
5.2% 9.7%
Fixed Variable
94.8% 90.3%
----- End of picture text -----

F. Liquidity Portfolio

The liquidity portfolio helps ensure the uninterrupted availability of funds to meet loan disbursements, debt servicing, and other cash requirements; provides a liquidity buffer in the event of financial stress; and contributes to ADB’s earning base. ADB’s Investment Authority governs ADB’s investments in liquid assets. The primary objective is to maintain the security and liquidity of funds invested. Subject to these two parameters, ADB seeks to maximize the total return on its investments. ADB does not switch currencies to maximize returns on investments, and investments are generally made in the same currencies in which they are received. At the end of 2012, ADB held liquid investments in 24 currencies.

Liquid investments are held in government and government-related debt instruments, time deposits, and other unconditional obligations of banks and financial institutions. To a limited extent, they are also held in corporate bonds that are rated at least A–. These investments are held in five portfolios—core liquidity, operational cash, cash cushion, discretionary liquidity, and ad hoc—all of which have different risk profiles and performance benchmarks. The year-end balance of the portfolios in 2012 and 2011 is presented in Table 8.

Table 8: Year-End Balance of Liquidity Portfolio[a]

($ million)

Item	2012	2011
Core Liquidity Portfolio	15,012.1	14,399.5
Operational Cash Portfolio	211.9	195.9
Cash Cushion Portfolio	1,412.2	2,136.0
Discretionary Liquidity Portfolio	7,091.4	4,407.5
Other Portfolio	603.3	562.4
Total	24,330.8	21,701.3

Note: Numbers may not sum precisely because of rounding.

a Including receivables for securities repurchased under resale arrangements, securities transferred under securities lending arrangements, and unsettled trades. The composition of the liquidity portfolio may shift from 1 year to another as part of ongoing liquidity management.

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Table 9: Return on Liquidity Portfolio

(%)

Item	Annualized Financial Return
	2012 2011
Core Liquidity Portfolio Operational Cash Portfolio Cash Cushion Portfolio Discretionary Liquidity Portfolioa Other Portfolio	2.08 3.44 0.13 0.09 0.56 0.57 0.37 0.44 0.82 3.57
aSpread over funding cost.

The core liquidity portfolio (CLP) is invested to ensure that the primary objective of a liquidity buffer is met. Cash inflows and outflows are minimized to maximize the total return relative to a defined level of risk. The portfolio has been funded by equity, and the average duration of the major currencies in the portfolio was about 1.9 years as of 31 December 2012.

The operational cash portfolio is designed to meet net cash requirements over a 1-month horizon. It is funded by equity and invested in short-term highly liquid money market instruments.

The cash cushion portfolio holds the proceeds of ADB’s borrowing transactions pending disbursement. It is invested in short-term instruments and aims to maximize the spread earned between the borrowing cost and the investment income.

The discretionary liquidity portfolio is used to support medium-term funding needs and is funded by debt to provide flexibility in executing the funding program over the medium term, and to opportunistically permit borrowing ahead of cash-flow needs and bolster ADB’s access to shortterm funding through continuous presence in the market.

G. Contractual Obligations

In the normal course of business, ADB enters into contractual obligations that may require future cash payments. Table 10 summarizes ADB’s significant contractual cash obligations as of 31 December 2012 and 2011. Long-term debt includes direct medium- and long-term borrowings, excluding swaps, and excludes unamortized premiums, discounts, and the effects of applying ASC 815. Other long-term liabilities correspond to accrued liabilities, including pension and postretirement medical benefits.

Table 10: Contractual Cash Obligations

($million)
Item	2012	2011
Long-Term Debt	60,694.4	56,902.6
Undisbursed Loan Commitments	30,500.3	28,349.9
Undisbursed Equity Investment
Commitments	652.0	611.5
Guarantee Commitments	2,614.2	2,480.4
Other Long-Term Liabilities	1,981.0	1,573.9
Total	96,441.9	89,918.3

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H. Risk Management

In its operations, ADB faces various kinds of risks, including financial, operational, and other organizational risks. ADB has a comprehensive risk management framework that is built on the three core components of governance, policies, and processes. Governance starts with the Board of Directors, which plays a key role in reviewing and approving risk policies that define ADB's risk appetite. ADB also maintains an independent risk management group and has various management-level committees with responsibility to oversee bank-wide risk issues and endorse related decisions for Board and President approval. ADB’s risk management framework also includes the Risk Committee, which provides high-level oversight of ADB’s risks and recommends risk policies and actions to the President.

ADB monitors the credit profile of existing transactions in the nonsovereign portfolio, conducts risk assessments of new nonsovereign transactions, and assumes responsibility for resolving distressed transactions when necessary. It also monitors market and credit risks in treasury operations, such as the credit quality of counterparties, interest rate risk, and foreign exchange risk. In addition, ADB has developed an operational risk management framework for the institution. For the aggregate portfolio, ADB monitors limits and concentrations, sets aside loan loss reserves and provides loan loss provisions including collective provision requirements, and assesses its capital adequacy.

In carrying out its mission, ADB is exposed to various risks: (i) credit risk, (ii) market risk, (iii) liquidity risk, and (iv) operational risk. This section will discuss each of these risks as well as ADB’s capital adequacy—ADB’s ultimate protection against unexpected losses—and its asset and liability management.

1. Credit Risk

Credit risk is the loss that could result if a borrower or counterparty defaults or if its creditworthiness deteriorates. Related to credit risk, ADB also faces concentration risk, which arises when a high proportion of the portfolio is allocated to a specific country, industry sector, obligor, type of instrument, or individual transaction.

ADB assigns a risk rating to each loan, guarantee, and treasury counterparty on an internal scale from 1 to 14 (Table 11). For sovereign and treasury counterparties, the external rating is used in assigning the internal rating. For nonsovereign transactions, the rating typically is not better than that of the sovereign.

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Table 11: Asian Development Bank Internal Risk Rating Scale

ADB Internal	Credit Rating
Rating Scale	Agency Equivalent	ADB Definitions
1	AAA / Aaa to A / A2	Lowest expectation of credit risk
2	A– / A3	Very low credit risk
3	BBB+ / Baa1	Low credit risk
4	BBB / Baa2	Low credit risk
5	BBB– / Baa3	Low to medium credit risk
6	BB+ / Ba1	Medium credit risk
7	BB / Ba2	Medium credit risk
8	BB– / Ba3	Medium credit risk
9	B+ / B1	Significant credit risk
10	B / B2	Significant credit risk
11	B– / B3	Significant credit risk
12	CCC+ / Caa1	High credit risk
13	CCC / Caa2 to C	Very high credit risk
14	D	Default

ADB = Asian Development Bank.

ADB is exposed to credit risk in its sovereign, nonsovereign, and treasury operations. The sovereign portfolio includes sovereign loan and guarantees, while the nonsovereign portfolio includes nonsovereign loan and guarantees, publicly traded equity, and private equity. The treasury portfolio includes fixed-income securities, cash and cash equivalents, and derivatives. Table 12 details the credit risk exposure and weighted average risk rating for each asset class. These figures are net of collateral, other credit enhancements, and impairment provisions. Overall, aggregate credit risk improved from 4.1 (BBB) in 2011 to 3.9 (BBB) in 2012.

Table 12: Exposure to Credit Risk

As of 31 December 2012 and 2011

Item	2011 Exposure Rating Exposure Rating ($million) (1–14) ($million) (1–14) 2012
Sovereign operations a. Loan and guarantee b. Equitya Nonsovereign operations a. Loan and guarantee b. Publicly traded equity c. Private equity Treasury a. Fixed income b. Cash instruments c. Derivatives	50,801.7 47,930.5 50,751.7 5.2 / BBB– 47,930.5 5.4 / BBB– 50.0 n/a – n/a 4,843.5 4,622.7 3,737.1 6.3 / BB+ 3,466.1 6.3 / BB+ 271.2 n/a 297.7 n/a 835.2 n/a 858.9 n/a 25,357.3 1.0 / AA 22,981.0 1.0 / AA 18,807.4 1.0 / AA 16,605.7 1.0 / AA+ 5,903.8 1.1 / AA– 5,771.3 1.1 / AA– 646.0 1.6 / A+ 604.0 1.4 / A+
Aggregate Exposure	81,002.5 3.9/BBB 75,534.2 4.1/BBB

– = nil, n/a = not applicable. Note: Numbers may not sum precisely because of rounding. a Shareholders of entity include sovereign members and Asian Development Bank.

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Credit risk in the sovereign portfolio. Sovereign credit risk is the risk that a sovereign borrower or guarantor will default on its loan or guarantee obligations. ADB manages its sovereign credit risk through loan loss reserves and maintaining conservative equity levels. OCR has not experienced any loss of principal from sovereign operations. When countries have delayed payments, they have returned their loans to accrual status and ADB has never had to write off a sovereign loan funded from OCR.

ADB charges provisions against income for a specific transaction if it is considered impaired. In addition, ADB also appropriates loan loss reserves within equity for the average loss that ADB could incur in the course of lending. The provisions are based on projections of future repayment capacity. The loan loss reserve is based on the historical default experience of sovereign borrowers to multilateral development banks. The sum of the provisions and loan loss reserve represents ADB’s expected loss for sovereign operations. The 2012 results are discussed below.

Sovereign loan and guarantee exposure. The weighted average risk rating of the sovereign loan and guarantee portfolio improved from 5.4 (BBB–) in 2011 to 5.2 (BBB–) in 2012 because of improving sovereign credit conditions in many of ADB’s DMCs and more disbursements to high rated countries which offset declining credit quality in some countries (Figure 3). Refer to Note E of OCR Financial Statements for additional information.

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Figure 3: Sovereign Loan and Guarantee Exposure by Credit Quality
As of 31 December 2012 and 2011
(%)
2012 2011
High
High
credit risk
credit risk
0.1
9.9
Low
credit risk
48.0
Medium
credit risk
22.4 Medium
Low credit risk
credit risk 51.9
67.7
----- End of picture text -----

Notes: Low credit risk = exposures with risk rating 1–5, medium credit risk = exposures with risk rating 6–11, high credit risk = exposures with risk rating 12–14.

Sovereign concentrations. ADB has assumed some concentration risk to fulfill its development mandate. The three largest borrowers—the People’s Republic of China (PRC), India, and Indonesia—represented 63.8% of the portfolio (Table 13).

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Table 13: Sovereign Country Exposure As of 31 December 2012 and 2011

Country	2011 $ million % $ million % 2012
People’s Republic of China India Indonesia Philippines Pakistan Others	12,620.2 24.8 11,693.4 24.4 10,732.2 21.1 9,844.3 20.5 9,062.8 17.8 9,503.5 19.8 5,894.2 11.6 5,569.0 11.6 4,995.0 9.8 5,296.6 11.1 7,497.3 14.8 6,023.7 12.6

Note: Percentages may not total 100% because of rounding.

Expected loss . In 2012, ADB experienced a decline in the credit quality of some countries in the sovereign portfolio. While the weighted average risk rating improved because these declines were offset by improvements in other countries, the net effect on expected loss is an increase from $158.2 million in 2011 to $217.8 million in 2012 (Table 14) because the declines took place in low rated countries.

Table 14: Sovereign Portfolio Expected Loss As of 31 December 2012 and 2011

Item	$ million % of SO portfolio $ million % of SO portfolio 2011 2012
Provision for Loan Losses Loan Loss Reserve Requirementa	– – – – 217.8 0.4 158.2 0.3
Expected Loss	217.8 0.4 158.2 0.3
– = nil, SO = sovereign operations.

a The loan loss reserve requirement is subject to the Board of Governors’ approval during the Annual Meeting in May 2013.

Credit and equity risks in the nonsovereign portfolio. Nonsovereign credit risk is the risk that a borrower will default on a loan or guarantee obligation for which ADB does not have recourse to a sovereign entity. ADB’s nonsovereign credit risk is considered more significant because of the uncertain economic environment in some of ADB’s markets. In addition, ADB’s exposure is concentrated in the energy and finance sectors. ADB employs various policy-based measures to manage these risks.

The Investment Committee and the Risk Committee oversee risks in the nonsovereign portfolio. The Investment Committee reviews all new nonsovereign transactions for creditworthiness and pricing. The Risk Committee monitors aggregate portfolio risks and individual transactions whose creditworthiness has deteriorated. The Risk Committee also endorses policy changes in managing the portfolio’s risks and approves provisions for impaired transactions.

ADB manages its nonsovereign credit risk by assessing all new transactions at the concept clearance stage and before final approval. Following approval, all exposures are reviewed at least annually; more frequent reviews are performed for those that are more vulnerable to default or have defaulted. In each review, ADB assesses whether the risk profile has changed, takes necessary actions to mitigate risks and either confirms or adjusts the risk rating, and updates the valuation for equity investments including assessing whether impairments are considered other than temporary. ADB will provide specific provisions where necessary in accordance with its provisioning policy.

ADB recognizes specific provisions in net income for known or probable losses in loans or guarantee transactions, and collective provisions for unidentified probable losses that exist in

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disbursed loan transactions rated below investment grade. In addition, ADB appropriates loan loss reserves within equity for the average loss that ADB would expect to incur in the course of lending for credit transactions rated investment grade and for the undisbursed portions of credit transactions rated worse than investment grade. Specific provisions are based on projections of future repayment capacity. The collective provision and loan loss reserve are based on historical default data from Moody’s Investors Service that is mapped to ADB’s portfolio. ADB annually tests whether this external data reasonably corresponds to ADB’s actual loss experience and may adjust estimates on the basis of this back testing. The sum of the specific provision, collective provision, and loan loss reserve represents ADB’s expected loss for nonsovereign operations.

ADB uses limits for countries, industry sectors, corporate groups, obligors, and individual transactions to manage concentration risk in the nonsovereign portfolio. The 2012 results are discussed below.

Nonsovereign loan and guarantee exposure . ADB assigns a risk rating to each nonsovereign loan and guarantee. During 2012, ADB’s weighted average risk rating stayed constant at 6.3 (BB+). The improvement was driven by an increase in risk transfer agreements with stronger rated entities. This was offset by an increase in transactions categorized as high credit risk which was triggered by a downgrade of the underlying sovereign rating (Figure 4). Refer to Note E of OCR Financial Statements for additional information.

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Figure 4: Nonsovereign Loan and Guarantee Exposure by Credit Quality
As of 31 December 2012 and 2011
(%)
2012 2011
High
High
credit risk
credit risk
2.6
12.2
Low
Low
credit risk
credit risk
39.4
39.2
Medium
credit risk
Medium 58.0
credit risk
48.6
----- End of picture text -----

Notes: Low credit risk = exposures with risk rating 1–5, medium credit risk = exposures with risk rating 6–11, high credit risk = exposures with risk rating 12–14.

Publicly traded equity exposure. The exposure of ADB’s publicly traded equity portfolio declined from $297.7 million in 2011 to $271.2 million in 2012. The drop was from equity exits conducted during the year rather than declining value.

Private equity exposure . The private equity portfolio has two components: (i) direct equity investments, where ADB owns shares in investee companies; and (ii) private equity funds, where ADB has partial ownership of a private equity fund, managed by a fund manager, which takes equity stakes in investee companies.

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Nonsovereign concentrations. The three largest nonsovereign country exposures as of 31 December 2012 were the PRC (20.9%), India (15.6%), and Pakistan (8.9%). The exposure of the top three countries slightly decreased from 45.8% in 2011 to 45.4% in 2012 (Table 15). All country exposures complied with ADB’s exposure limits.

Table 15: Nonsovereign Country Exposure

As of 31 December 2012 and 2011

Country	$ million % $ million % 2012 2011
People’s Republic of China India Pakistan Philippines Indonesia Thailand Others	1,014.6 20.9 1,055.0 22.8 753.2 15.6 668.1 14.5 430.0 8.9 394.6 8.5 258.7 5.3 288.1 6.2 240.0 5.0 227.2 4.9 228.2 4.7 183.1 4.0 1,918.9 39.6 1,806.7 39.1

On 13 July 2012, ADB revised the industry sector classifications for the nonsovereign portfolio (based on the Global Industry Classification Standard) in order to (i) obtain a system more suitable for exposure management purposes, (ii) enhance the information provided by the classifications, and (iii) increase the ease of classification of borrowers by individual analysts. Under the new system, ADB is dominated by the utilities sector (Table 16). ADB maintains higher exposures to these sectors because of the importance of infrastructure to economic development. To mitigate sector concentration, ADB conducts additional monitoring of and reporting on these sectors and employs specialists in these areas.

Table 16: Nonsovereign Sector Exposure As of 31 December 2012 and 2011

Sector	$ million % $ million % 2012 2011
Utilities Banks Energy Diversified Financials Administration Others	1,988.7 41.1 1,681.1 36.4 817.4 16.9 1,104.7 23.9 575.1 11.9 520.9 11.3 517.5 10.7 576.9 12.5 350.0 7.2 231.6 5.0 594.9 12.3 507.5 11.0

Note: Percentages may not total 100% because of rounding.

Expected loss . Expected loss in the nonsovereign portfolio increased in 2012 (Table 17). The primary driver of the increase was an increase in transactions with high credit risk.

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Table 17: Nonsovereign Portfolio Expected Loss

As of 31 December 2012 and 2011

Item	$ million % of NSO portfolioa $ million % of NSO portfolioa 2012 2011
Specific Provision for Loan Losses Collective Provision for Loan Losses Loan Loss Reserve Requirementb	13.0 0.3 9.6 0.3 29.6 0.8 25.4 0.7 43.4 1.2 35.6 1.0
Expected Loss	86.0 2.3 70.6 2.0

NSO = nonsovereign operations. a Percentage only applies to the loan and guarantee operations of the nonsovereign portfolio. b The loan loss reserve requirement is subject to the Board of Governors’ approval during the Annual Meeting in May 2013.

Credit risk in the treasury portfolio. Issuer default and counterparty default are credit risks that affect the treasury portfolio. Issuer default is the risk that a bond issuer will default on its interest or principal payments, while counterparty default is the risk that a counterparty will not meet its contractual obligations to ADB.

To mitigate issuer and counterparty credit risks, ADB only transacts with financially sound institutions with ratings from at least two reputable external rating agencies. Moreover, the treasury portfolio is generally invested in conservative assets, such as money market instruments and government securities. In addition, ADB has established prudent exposure limits for its corporate investments, depository relationships, and other investments.

ADB has counterparty eligibility criteria to mitigate counterparty credit risk arising through derivative transactions. In general, ADB will only undertake swap transactions with counterparties that meet the required minimum counterparty credit rating, have executed an International Swaps and Derivatives Association Master Agreement or its equivalent, and have signed a credit support annex. Under the credit support annex, derivative positions are marked to market daily, and the resulting exposures are generally collateralized by US dollar cash and/or US Treasuries. ADB also sets exposure limits for individual swap counterparties and monitors these limits against current and potential exposures. ADB enforces daily collateral calls as needed to ensure that counterparties meet their collateral obligations. The 2012 results are discussed below.

The weighted average credit rating for the treasury portfolio was AA in 2012. About 99% of the portfolio was rated A– or better.

As of 31 December 2012, no fixed-income instruments, derivatives, or other treasury exposures were past due or impaired, the same as in 2011.

Deposits. ADB deposits funds only in institutions that have a minimum long-term average credit rating of A+ or short-term credit rating of A-1 and P-1. ADB maintains a watch list of institutions that it perceives as potentially riskier based on internal credit risk assessments. Moreover, the size of the deposit is limited by the counterparty’s equity and creditworthiness. Generally, depository credit risk is low, and all deposits are with institutions rated A+ or better.

Fixed income. Sovereign and sovereign-guaranteed securities represent 94% of ADB’s fixed income assets. The remainder are in corporate bonds that are rated at least A– (Table 18). ADB has monitored market developments closely, such as the US sovereign credit rating downgrade and the European sovereign debt crisis, and adjusted its risk exposures accordingly.

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Table 18: Fixed Income Portfolio by Asset Class As of 31 December 2012 and 2011

Item	$ million % $ million % 2012 2011
Government Government Guaranteed Government-Sponsored Enterprises and Supranationals Corporates	10,122.2 53.8 7,332.4 44.2 3,630.5 19.3 3,982.7 24.0 3,856.8 20.5 3,722.7 22.4 1,198.0 6.4 1,567.9 9.4
Total	18,807.4 100.0 16,605.7 100.0

Note: Numbers may not sum precisely because of rounding.

Derivatives . All swap counterparties are rated at least A–. The current exposure to counterparties rated A– through A+ is generally fully collateralized, while the uncollateralized exposure to those rated AA– and above are subject to specified thresholds. ADB maintains a watch list of institutions that it perceives as potentially riskier based on internal credit risk assessments. At the end of 2012, 89% of the marked-to-market exposure was collateralized.

Country exposure. At the end of 2012, treasury credit risk exposure was allocated across 28 countries with the largest exposure in Japan (Table 19).

Table 19: Treasury Country Exposure As of 31 December 2012 and 2011

Country	$ million % $ million % 2012 2011
Japan United States Germany Australia Republic of Korea Others	9,536.1 37.6 7,740.0 33.7 5,770.9 22.8 5,088.0 22.1 1,993.7 7.9 1,622.1 7.1 1,172.8 4.6 1,757.3 7.6 1,096.9 4.3 389.4 1.7 5,787.0 22.8 6,384.1 27.8
Total	25,357.3 100.0 22,981.0 100.0
Note: Numbers may not sum precisely because of rounding.

European exposure. Exposure to European credits has been monitored by conducting daily surveillance of the rating and fair value of the exposure and restrictions are in place for new transactions.

2. Market Risk

Market risk is the risk of loss on financial instruments because of changes in market prices. ADB principally faces three forms of market risk: (i) equity price risk, which was discussed above with the nonsovereign portfolio; (ii) interest rate risk; and (iii) foreign exchange risk. Interest rate risk and foreign exchange risk are discussed in this section.

Interest rate . Interest rate risk in the operations portfolio is hedged as the basis for borrowers’ interest payments are matched to ADB’s borrowing expenses. Therefore, the borrower must assume or hedge the risk of fluctuating interest rates, whereas ADB’s margins remain largely constant.

ADB is primarily exposed to interest rate risk through the liquidity portfolio. ADB monitors and manages interest rate risks in the liquidity portfolio by employing various quantitative methods. It marks all positions to market, monitors interest rate risk metrics, and employs stress testing and scenario analysis.

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ADB uses duration and interest rate value-at-risk (VaR) to measure interest rate risk in the treasury portfolio. Duration is the estimated percentage change in the portfolio’s value in response to a 1% parallel change in interest rates. Interest rate VaR is a measure of possible loss at a given confidence level in a given time frame because of changes in interest rates. ADB uses a 95% confidence level and a 1-year horizon. In other words, ADB would expect to lose at least this amount once every 20 years because of fluctuations in interest rates. ADB uses duration and VaR to measure interest rate risk across the liquidity portfolio, with particular attention to the CLP, which is the most exposed to interest rate risk.

Foreign exchange . ADB endeavors to minimize exposure to exchange rate risk in its operations. In both the operations and treasury portfolios, ADB is required to match the currency of its assets with the currencies of liabilities and equity. Borrowed funds or funds to be invested may only be converted into other currencies provided that they are fully hedged through crosscurrency swaps or forward exchange agreements. However, because of its multicurrency operations, ADB is exposed to fluctuations in reported US dollar results due to currency translation adjustments.

ADB monitors VaR and duration, and performs stress testing to manage market risk in the investment portfolio. The major currencies of the CLP bear the majority of ADB’s market risks and account for 58% of ADB’s OCR, while major currencies account for 94% of the CLP. Major currencies include the US dollar, yen, euro, pound sterling, Australian dollar, and Canadian dollar.

Value-at-risk. Aggregate VaR of major currencies of the CLP, which includes interest rate and foreign exchange risks, decreased from 3.5% in 2011 to 1.9% in 2012. This means that there is a 5% probability that the portfolio will lose more than 1.9% ($270.7 million) of its value over the next year. These potential loss estimates continued to decrease in 2012 in line with the decrease in portfolio duration.

Duration. The major CLP’s interest rate sensitivity, as reflected in its weighted portfolio duration, decreased from 2.3 years as of 2011 to 1.9 years as of 2012.

Stress testing . ADB measures how sensitive the major CLP is to interest rate changes. If interest rates were to rise 2%, the major CLP portfolio would be expected to lose 3.7% ($539.9 million). ADB also uses scenario analysis to assess how the major CLP would respond to significant changes in market factors, such as those that have occurred in the past. Because of the high quality of ADB’s investments, scenario analysis suggests that the treasury portfolio would appreciate during many stressed scenarios as demand for highly rated securities increases.

3. Liquidity Risk

Liquidity risk can arise if ADB is unable to raise funds to meet its financial and operational commitments. ADB maintains core liquidity to safeguard against a liquidity shortfall in case its access to the capital market is temporarily denied. The overriding objective of the liquidity policy is to enable ADB to obtain the most cost-efficient funding under both normal and stressed situations and manage liquidity optimally to achieve its development mission. The Board of Directors approved a revised liquidity policy framework in December 2011. The revised policy redefined the prudential minimum liquidity as 45% of the 3-year net cash requirements. This represents the minimum amount of liquidity necessary for ADB to continue operations even if access to capital markets is temporarily denied. Maintaining the prudential minimum liquidity level is designed to enable ADB to cover normal net cash requirements for 18 months under the normal and stressed situations without borrowing. The liquidity levels and cash requirements

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are monitored on an ongoing basis and reviewed by the Board of Directors quarterly. The new policy allows for discretionary liquidity portfolio to maintain a debt funded sub-portfolio that will be excluded from the net cash requirements and prudential minimum liquidity calculations.

4. Operational Risk

ADB’s operational risk management is based on a framework endorsed by the Risk Committee and approved by the President in 2012. The framework defines operational risk as the risk of loss resulting from inadequate or failed internal processes, people, and systems; or from external events. It serves as the basis for implementation of operational risk management in ADB.

ADB’s operational risk management approach focuses on identifying, assessing, and managing risks to minimize potential adverse impacts. Key components of ADB’s operational risk management approach include (i) employing the Operational Risk Self Assessment in its key business areas, (ii) using Key Risk Indicators for operational risk profile monitoring and the collection of risk event information, and (iii) promoting risk awareness including presentations to staff on the application of the methodologies.

ADB is exposed to many types of operational risk, which it mitigates by applying sound internal controls and monitoring areas of particular concern. ADB utilizes risk transfer, including insurance, for mitigating low frequency and high severity operational risks. ADB continues to rollout operational risk management methodologies and tools across organizational lines.

5. Capital Adequacy

ADB’s most significant risk is if a large portion of its loan portfolio were to default. Credit risk is measured in terms of both expected and unexpected losses. For expected losses, ADB holds loan loss reserves and provisions. For unexpected losses, ADB relies on its income-generating capacity and capital, which is a financial institution’s ultimate protection against unexpected losses that may arise from credit and other risks.

ADB principally uses stress testing to assess the capacity of its capital to absorb unexpected losses. The framework has two objectives. First, it measures ADB’s ability to absorb income losses because of a credit shock. Through this monitoring, ADB reduces the probability that it would have to rely on shareholder support, such as additional paid-in capital or a capital call. As a result, ADB has been able to support its AAA credit rating, which reduces ADB’s borrowing costs and consequently its lending rates.

Second, the framework evaluates ADB’s ability to generate sufficient income to support loan growth after a credit shock. As a development institution, ADB’s mandate becomes more important during a financial crisis when some DMCs may find their access to capital markets limited. Demand for ADB assistance may rise under such adverse conditions.

For the stress test, ADB generates thousands of potential portfolio scenarios and imposes credit shocks that are large enough to account for 99% of those scenarios. ADB then assesses the impact of these shocks on its capital by modeling the ratio of equity to loans over the next 10 years. Throughout 2012, the stress test indicated that ADB had adequate capital to absorb the losses of a severe credit shock and to continue its development lending.

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6. Asset and Liability Management

ADB has an asset and liability management policy framework that guides all financial policies related to asset and liability management including liquidity, investments, equity management, and capital adequacy. The objectives of the asset and liability management are to safeguard ADB’s net worth and capital adequacy, promote steady growth in ADB’s risk-bearing capacity, and define sound financial policies to undertake acceptable levels of financial risks. The aim is to provide resources for developmental lending at the lowest and most stable funding cost to the borrowers, along with the most reasonable lending terms, while safeguarding ADB’s financial strength. ADB’s asset and liability management safeguards net worth from foreign exchange rate risks, protects net interest margin from fluctuations in interest rates, and provides sufficient liquidity to meet ADB’s operations. ADB also adheres to cost pass-through pricing policy for loans to sovereign borrowers, and allocates the most cost-efficient borrowing based on cost and maturity to fund the loans.

I. Internal Control over Financial Reporting

ADB’s Management has been assessing the effectiveness of its internal controls over financial reporting since 2008 using criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission in Internal Control – Integrated Framework . ADB continues to apply a risk-based evaluation framework for the assertion and attestation of the effectiveness of Internal Control over Financial Reporting for OCR and Special Funds, except for the ADB Institute (ADBI). The scope included a review of 51 business processes over financial reporting and four domains for the information technology general computer controls. In 2010, ADB expanded the testing to include trust funds. ADB staff across several departments and offices is responsible for (i) identifying and testing key controls and (ii) assessing and evaluating the design and operating effectiveness of the business processes. Concurrently in 2012, the external auditor performed an independent test of selected key controls and concurred with Management that ADB maintained effective internal control over financial reporting for OCR and Special Funds (except for the ADBI).

J. Critical Accounting Policies and Estimates

Significant accounting policies are contained in Note B of the OCR financial statements. As disclosed in the financial statements, management estimates the fair value of financial instruments. Since the estimates are based on judgment and available information, actual results may differ and might have a material impact on the financial statements.

Fair value of financial instruments. Under statutory reporting, ADB carries selected financial instruments and derivatives, as defined by ASC 815 and 825, on a fair value basis. These financial instruments include embedded derivatives that are valued and accounted for in the balance sheet as a whole. Fair values are usually based on quoted market prices. If market prices are not readily available, fair values are usually determined using market-based pricing models incorporating market data and require judgment and estimates. These are discussed in more detail in Note B of OCR’s financial statements.

The pricing models used to determine the fair value of ADB’s financial instruments are based on discounted cash flow models. ADB reviews the pricing models to assess the appropriateness of assumptions to reflect the reasonable valuation of the financial instruments. In addition, the fair values derived from the models are subject to ongoing internal and external verification and review. The models use market-sourced inputs, such as interest rates, exchange rates, and option volatilities. The selection of these inputs may involve some judgment and may impact net income. ADB believes that the estimates of fair values are reasonable.

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Provision for loan losses and loan loss reserves . In 2006, the Board approved the revision of the loan loss provisioning methodology for ADB’s nonsovereign operations to a risk-based model. Provision against loan losses for impaired loans reflects management’s judgment and estimate of the present value of expected future cash flows discounted at the loan’s effective interest rate. ADB considers a loan impaired when, based on current information and events, ADB will probably be unable to collect all the amounts due according to the loan’s contractual terms. The provisioning estimate is done quarterly. In 2010, ADB refined the provisioning methodology to include collective provisioning for the nonsovereign portfolio.

ADB uses an internal risk rating system to estimate expected loss for unimpaired loans. The probability of default is based on the historical default experience of sovereign borrowers to multilateral development institutions; for nonsovereign loans, it is based on Moody’s Investors Service default data. A loan loss reserve is established within equity for the expected losses as an allocation of net income subject to the approval of the Board of Governors.

Pension and other postretirement benefits. ADB provides staff retirement benefit and postretirement medical benefit plans for all eligible staff members, provided they have not reached the normal retirement age of 60. Costs relating to net periodic benefit cost are allocated between OCR and the ADF based on the agreed cost sharing methodology. The underlying actuarial assumptions used to determine the projected benefit obligations, accumulated benefit obligations, and funded status associated with these plans are based on market interest rates, past experience, and management’s best estimate of future benefit changes and economic conditions. For further details, refer to Notes to Financial Statements—Note O—Staff Retirement Plan and Postretirement Medical Benefits.

III. SPECIAL FUNDS

ADB is authorized by its Charter to establish and administer Special Funds. These are the ADF, the TASF, the Japan Special Fund, the ADBI, the Pakistan Earthquake Fund (PEF), the Regional Cooperation and Integration Fund, the Climate Change Fund, and the Asia Pacific Disaster Response Fund. Financial statements for each Special Fund are prepared in accordance with US GAAP except for the ADF’s, which are special purpose financial statements.

A. Asian Development Fund

The ADF is ADB’s concessional financing window for DMCs with per capita gross national income below the ADB operational cutoff and limited or low creditworthiness. It provides a multilateral source of concessional assistance dedicated exclusively to reducing poverty and improving the quality of life in Asia and the Pacific. The ADF has received contributions from 32 donors (regional and nonregional). Cofinancing with bilateral and multilateral development partners complements ADF resources.

In July 2012, the Board of Governors adopted the resolution providing for the tenth replenishment of the ADF (ADF XI) and the fifth regularized replenishment of the TASF. The resolution provides for a substantial replenishment of the ADF to finance ADB’s concessional program for 4 years from January 2013, and for a replenishment of the TASF in conjunction with the ADF replenishment to finance TA operations under the TASF. The total replenishment size of SDR7.9 billion ($12.4 billion at Resolution No. 357 exchange rates) consisted of SDR7.7 billion for ADF XI and SDR0.2 billion for the TASF. About 37.5% of the replenishment will be financed from new donor contributions totaling SDR3.0 billion ($4.6 billion equivalent).

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Currency management. ADB revised the currency management framework for the ADF in 2006. The previous practice of managing ADF resources in as many as 15 currencies was discontinued, and an approach based on an SDR basket of currencies (US dollar, euro, pound sterling, and yen) was introduced. ADF donor contributions and loan reflows received in currencies that are not part of the SDR basket are converted into one of the currencies in the basket to maintain the SDR-based liquidity portfolio. In addition, the borrower’s obligations for new ADF loans are determined in SDR. Starting in 2008, ADB extended the full-fledged SDR approach to ADF legacy loans by providing ADF borrowers the option to convert their existing liability (i.e., disbursed and outstanding loan balance) in various currencies into SDR, while the undisbursed portions were to be treated as new loans redenominated in SDR. As of 31 December 2012, 18 of 28[5] borrowing members have signified their agreement to the conversion. The outstanding balance of their SDR-converted loans amounted to $12.9 billion.

Framework for grants and hard-term facility. In September 2007, the Board of Directors approved the ADF grant framework, which limits grant eligibility to ADF-only countries and introduced a new hard-term ADF lending facility. The facility will have a fixed interest rate of 150 basis points below the weighted average of the 10-year fixed swap rates of the SDR basket of currencies plus the OCR lending spread, or the current ADF rate, whichever is higher. Other terms are similar to those of regular ADF loans. In general, blend countries with per capita income not exceeding the International Development Association (IDA) operational cutoff for more than 2 consecutive years and with an active OCR lending program are eligible to borrow from this new facility. The interest rate that is fixed for the life of hard-term loans approved during the year is reset every January. For hard-term ADF loans approved in 2012, the interest rate was set at 1.0% during the grace period and 1.5% thereafter (2011: 2.02%). Two loans were approved under this facility in 2012.

Liquidity management. ADF manages its liquidity assets under two tranches to allow for the optimal use of financial resources. The main objective of the first tranche is to ensure adequate liquidity is available to meet the expected cash requirements. The second tranche comprises the prudential minimum liquidity the ADF should hold to meet unexpected demands and any usable liquidity for future commitments. This approach ensures that liquidity is managed transparently and efficiently.

Heavily Indebted Poor Countries Initiative. In response to ADF donors’ request, the ADB Board of Governors adopted a resolution on 7 April 2008 for ADB to participate in the Heavily Indebted Poor Countries (HIPC) Initiative and to provide Afghanistan with debt relief. The estimated principal amount of Afghanistan’s ADF debt to be forgiven and charged against ADF income was $82.4 million.

Launched in 1996 by the IDA and the International Monetary Fund (IMF), the HIPC Initiative provides partial debt relief to poor countries with levels of external debt that severely burden export earnings or public finance. In 1999, the initiative was enhanced to enable more countries to qualify for HIPC relief. The IDA and the IMF reported that several ADF borrowers met the income and indebtedness criteria of the HIPC Initiative and were potentially eligible for HIPC debt relief.[6] Of these, only Afghanistan became eligible and reached the decision point under

5 Thirty borrowers were eligible when the SDR conversion option for legacy ADF loans was offered in 2008. One borrower has paid off all its loans and another opted for the accelerated repayment of its legacy loans which reduced the number of borrowing member countries to 28.

6 These included Bhutan, Kyrgyz Republic, Lao People’s Democratic Republic (Lao PDR), Nepal, and Sri Lanka. Subsequently, Afghanistan was assessed to be potentially eligible for HIPC debt relief. At that time, the authorities of Bhutan, Lao PDR, and Sri Lanka had indicated to the IMF and World Bank staff that they did not wish to avail of the HIPC Initiative. In the absence of data, no debt assessment could be made for Myanmar. The authorities of Myanmar also indicated that they could not provide the data needed for the assessment and that they did not want to benefit from debt relief under the HIPC Initiative at that time.

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the HIPC Initiative on 9 July 2007. The decision point is where a HIPC country, having met certain conditions,[7] becomes eligible to receive interim debt relief on a provisional basis following the ADB Board of Directors’ approval to provide debt relief under the HIPC Initiative. Debt relief has been delivered by partial reduction of debt service payments as they come due.

On 26 January 2010, the executive boards of the IDA and the IMF agreed that Afghanistan had reached the completion point under the HIPC Initiative. Thus, debt relief to Afghanistan under the initiative had become irrevocable. The amount of debt relief including principal and interest was revised to $106.0 million and was to be provided through a reduction of Afghanistan’s debt service from July 2008 to February 2028. As of December 2012, the ADF had delivered $4.7 million under this arrangement, bringing the balance to $101.3 million.

Contributed resources. The total replenishment of SDR7.6 billion for ADF X comprise SDR4.6 billion financed from internal resources, SDR2.7 billion from new donor contributions, and SDR0.3 billion from net income transfers from OCR. This covers 2009–2012, which became effective in June 2009 after instruments of contribution deposited with ADB for unqualified contribution exceeded 50% of all pledged contributions. As of 31 December 2012, 30 donors[8] had contributed a total of $4.4 billion equivalent, of which $4.0 billion (including the allocation to the TASF) had been received and made available for operational commitments. The remaining unpaid contributions under ADF VIII, ADF IX, and ADF X as of 31 December 2012 totaled $547.1 million.[9] (For details of amounts released for operational commitment in 2012, see the column labeled “Addition” in Table 32 of the Operational Data).

The commitment authority available for future commitments comprises the resources available to the ADF for its future lending activities in the form of loans and grants. These resources are derived from donor contributions, reflow-based resources, and net income transfers from OCR. The balance of the commitment authority available for operations as of 31 December 2012 was $0.8 billion, compared with $1.4 billion as of 31 December 2011 (Table 20).

In May 2012, the Board of Governors approved the transfer of $120.0 million to the ADF as part of OCR’s net income allocation (2011: $120.0 million). In addition, $1,017.7 million from loan and grant savings and cancellations were included in the commitment authority. This resulted from Management’s continued assessment of opportunities to free committed resources through cancellations of unused loan and grant balances.

During 2012, deposited installments under ADF X amounted to $1,068.1 million, and ADF X promissory notes encashed totaled $735.2 million. Around $88.9 million was transferred to the TASF.

Loan approvals, disbursements, and repayments. In 2012, 61 ADF loans totaling $2.3 billion were approved compared with 39 ADF loans totaling $2.0 billion in 2011. Disbursements during 2012 totaled $1.3 billion, a decrease of 7.2% from $1.4 billion in 2011. At the end of 2012, cumulative disbursements from ADF resources were $33.6 billion. Loan repayments during the year totaled $1.1 billion. At the end of 2012, outstanding ADF loans amounted to $29.2 billion.

7 The conditions are that an HIPC country has a track record of macroeconomic stability and an interim poverty reduction strategy in place and has been cleared of any outstanding arrears. 8 Italy paid 36.5% of its total contribution in November 2012 but has yet to submit its instrument of contribution. 9 At US dollar equivalent at 31 December 2012 exchange rates.

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Table 20: Asian Development Fund Commitment Authority[a]

31 December 2012 and 2011

($ million)

31 December 2012 and 2011 ($million)
Item	2012 2011
Carryover of ADF IX Commitment Authorityb ADF X Contributions ADF IX Contributions ADF VIII Contributions Reflow-based Resources OCR Net Income Transfer Savings and Cancellations Credits from Accelerated Note Encashment Program Total ADF X Commitment Authority Loans and Grants Committed	121.8 121.6 3,734.5 2,818.2 135.3 135.1 8.2 8.2 7,112.0 5,886.6 480.0 360.0 1,017.7 830.5 50.7 0.9 12,660.2 10,161.2 11,811.1 8,789.9 c d e f g
ADF Commitment Authority Available for Future Commitments	849.1 1,371.3

ADF = Asian Development Fund, OCR = ordinary capital resources.

Note: Numbers may not sum precisely because of rounding.

• a The Asian Development Bank monitors the ADF commitment authority based on special draw ing rights. All reported figures are based on special draw ing rights translated to United States dollar as of 31 December 2012.

• b The United States dollar equivalent of SDR79.2 million at the year-end exchange rate, w hich reflects the cumulative commitment authority for ADF IX.

• c Follow ing the partial payment of a qualified contributor, amounts from the installment payments of donors w ho exercised their pro rata rights have been w ithheld for operational commitment.

• d Represents the (i) balance of the third installment and 27.59% of the fourth installment payment of the United States, (ii) corresponding release of amounts w ithheld due to the pro rata exercise, and (iii) Italy’s full payment of the balance of its contribution.

• e Represents 99.16% of Austria’s fourth installment payment, w hich w as released and made available for operational commitment.

• f Includes the (i) liquidity draw dow n of SDR1.1 billion, (ii) additional liquidity of SDR270 million released from the foreign exchange provision, and (iii) additional assistance to Afghanistan of $162 million as a result of the suspension of the post-conflict phase out.

• g Includes additional resources from the accelerated note encashment (i) in ADF X, and (ii) the remaining balance of Italy’s ADF IX contribution.

Status of loans. At the end of 2012, 28 sovereign loans to one borrower with total principal outstanding of $590.8 million were in nonaccrual status. These represented about 2.0% of the total outstanding ADF loans. In January 2013, the borrower cleared all the arrears due on its loans.

Project design facility. In April 2011, ADB established the project design facility (PDF) on a pilot basis to support project preparation, particularly detailed engineering designs, through project design advances. Loans approved under the PDF carry standard interest of OCR or the ADF. Payment of interest is deferred until the project design advance is refinanced out of the proceeds of the loan, or other repayment terms take effect. As of 31 December 2012, one ADF loan was approved under the PDF.

Investment portfolio position. The ADF investment portfolio[10] totaled $6.5 billion at the end of 2012 compared with $6.1 billion at the end of 2011. About 28.4% of the portfolio was invested in bank deposits, and 71.6% was invested in fixed-income securities. The annualized rate of return on ADF investments including unrealized gains and losses was 1.1% (2011: 1.5%).

10 Includes securities purchased under resale arrangement.

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Grants. In 2012, ADB approved 23 grants (2011: 16) totaling $693.0 million (2011: $596.8 million), while 20 grants (2011: 34) totaling $383.6 million (2011: $1,120.6 million) became effective, net of $35.5 million (2011: $3.6 million) in write-backs of undisbursed commitments for savings on financially closed and/or cancelled projects.

Official cofinancing for loans and grants. In 2012, $429.2 million (2011: $1,510.2 million) was mobilized in official loan and grant cofinancing for 27 ADF-financed projects (2011: 20) totaling $1,467.2 million (2011: $1,316.1 million).

B. Technical Assistance Special Fund

The TASF was established to provide TA on a grant basis to ADB’s DMCs and regional TA.

In August 2008, as part of the ADF X replenishment, the donors agreed to contribute 3% of the total replenishment as the fourth replenishment of the TASF in consideration of the demand estimate and the availability of funds from other sources. The replenishment covers 2009–2012.

Contributed resources. As of 31 December 2012, 30 donors had committed a total of $332.2 million to the TASF as part of the ADF X and the fourth regularized replenishment of the TASF. Of the total commitment, $299.5 million had been received.

During 2012, India made a direct voluntary contribution of $0.2 million, and Pakistan made a direct voluntary contribution of $0.1 million. In addition, $40.0 million was allocated to the TASF as part of the OCR’s net income allocation, and $4.1 million was received from the fourth regularized replenishments of the TASF. At the end of 2012, TASF resources totaled $1,892.4 million, of which $1,751.2 million was committed, leaving an uncommitted balance of $141.2 million ($225.1 million as of 31 December 2011).

Table 21: Technical Assistance Special Fund Cumulative Resources ($ million)

($million)
Item	2012	2011
Regularized Replenishment
Contributions	766.8	762.8
Allocations from OCR Net Income	849.0	809.0
Direct Voluntary Contributions	90.2	89.9
Income from Investment and
Other Sources	189.9	186.6
Transfers from the TASF to the ADF	(3.5)	(3.5)
Total	1,892.4	1,844.8

( ) = negative, ADF = Asian Development Fund, OCR = ordinary capital resources, TASF = Technical Assistance Special Fund.

Operations. TA commitments (approved and effective) increased from $111.9 million in 2011 to $128.3 million in 2012 for 193 TA projects that were made effective during the year, net of $19.2 million (2011: $19.0 million) in write-backs of undisbursed commitments for completed and canceled TA projects. Undisbursed commitments net of advances for TA increased to $321.0 million as of 31 December 2012 ($297.3 million as of 31 December 2011). The TASF financed 47.8% of all TA activities approved in 2012.

Investment position. As of 31 December 2012, the total investment portfolio, including securities purchased under resale arrangements, amounted to $416.7 million, compared with

ADB MANAGEMENT’S DISCUSSION AND ANALYSIS: 31 DECEMBER 2012

31

$391.9 million as of the end of 2011. With the low interest rate environment, revenue from investments decreased from $3.3 million in 2011 to $3.0 million in 2012.

C. Japan Special Fund

The Japan Special Fund was established in 1988 when ADB, acting as the administrator, entered into a financial arrangement with the Government of Japan, which agreed to make the initial contribution to help ADB’s DMCs restructure their economies and broaden the scope of opportunities for new investments, mainly through TA operations.

Contributed resources. As of 31 December 2012, Japan’s cumulative contribution to the fund since its inception in 1988 amounted to ¥112.9 billion ($973.7 million equivalent), comprising regular contributions of ¥94.8 billion ($822.9 million equivalent) and supplementary contributions of ¥18.1 billion ($150.8 million equivalent). The uncommitted balance, including approved TA that are not yet effective, was $61.3 million as of 31 December 2012 ($57.4 million as of 31 December 2011).

Operations. In 2012, net TA written back totaled $4.0 million (2011: $4.7 million) consisting of one TA amounting to $0.9 million that became effective and $4.8 million write-back for financially completed and cancelled projects (2011: one TA project amounting to $0.7 million and $5.4 million write-back). Undisbursed commitments net of advances for TA as of 31 December 2012 was $21.0 million, compared with $36.7 million as of the end of 2011.

Investment position. As of 31 December 2012, the total investment portfolio amounted to $81.9 million, lower than the balance of $93.9 million as of 31 December 2011. With the low interest rate environment, revenue from investments decreased from $0.22 million in 2011 to $0.18 million in 2012.

D.

ADB Institute

The ADBI was established in 1996 as a subsidiary body of ADB. The Institute’s objectives are to identify effective development strategies and capacity improvements for sound development management in DMCs. Its operating costs are met by the Institute, and it is administered in accordance with the Statute of the Institute.

In August 2012, the Government of Japan made its 19th contribution to the Institute amounting to ¥672.1 million ($8.6 million equivalent). In December 2012, the Government of Japan committed its 20th contribution for ¥672.1 million ($7.8 million equivalent). In January 2012, the Republic of Korea made its first contribution to the Institute through the Republic of Korea e- Asia & Knowledge Partnership Fund amounting to $1.5 million. In June 2012, the Government of Australia made its third contribution amounting to A$0.6 million ($0.6 million equivalent).

As of 31 December 2012, cumulative contributions committed to the Institute amounted to ¥20.6 billion, A$1.6 million, and $1.5 million (about $194.4 million equivalent), excluding translation adjustments. Of the total contributions received, $192.0 million had been used by the end of 2012 mainly for research and capacity building activities, including (i) organizing symposia, forums, and training sessions; (ii) preparing research reports, publications, and websites; and (iii) associated administrative expenses. The balance of net current assets (excluding property, furniture, and equipment) available for future projects and programs was about $10.3 million.

ADB MANAGEMENT’S DISCUSSION AND ANALYSIS: 31 DECEMBER 2012

32

E. Pakistan Earthquake Fund

The PEF was established in November 2005 in response to the special needs of Pakistan following the earthquake on 8 October 2005. The dedicated fund is to deliver emergency grant financing for investment and TA projects to support immediate reconstruction, rehabilitation, and associated development activities. The PEF was terminated on 30 June 2011, but actions necessary to wind up its activities are continuing.

Contributed resources. ADB contributed $80.0 million to the fund in November 2005. In addition, Australia contributed $15.0 million; Belgium, $14.3 million; Finland, $12.3 million; and Norway, $20.0 million. As of 31 December 2012, PEF resources totaled $146.8 million, of which $142.4 million had been utilized, leaving an uncommitted balance of $4.4 million ($4.6 million as of 31 December 2011).

Operations . No new TA or grants were approved or made effective in 2012 and 2011. The balance of undisbursed commitments net of grant advances as of 31 December 2012 amounted to $14.0 million, compared with $16.8 million as of the end of 2011.

Investment position. As of 31 December 2012, the total investment portfolio amounted to $17.7 million ($20.8 million as of 31 December 2011). Revenue from investments for 2012 was $0.2 million (2011: $1.0 million), reflecting the low interest rate environment.

F. Regional Cooperation and Integration Fund

The Regional Cooperation and Integration Fund was established in February 2007 in response to the increasing demand for regional cooperation and integration activities among ADB’s member countries in Asia and the Pacific. Its main objective is to improve regional cooperation and integration by facilitating the pooling and provision of additional financial and knowledge resources.

Contributed resources. ADB contributed $40.0 million to the fund as part of the 2006 OCR net income allocation. In May 2010, $10.0 million was transferred to the fund from OCR allocable net income. As of 31 December 2012, the fund’s resources totaled $53.1 million, of which $51.4 million had been utilized, leaving an uncommitted balance of $1.7 million ($4.1 million as of 31 December 2011).

Operations . In 2012, four TA projects totaling $2.1 million became effective (2011: seven TA projects for $5.7 million), net of $0.3 million (2011: $0.3 million) savings on financially completed and/or cancelled projects. The balance of undisbursed commitments net of grant advances as of 31 December 2012 amounted to $16.2 million, compared with $22.1 million as of the end of 2011.

Investment position. As of 31 December 2012, the total investment portfolio amounted to $17.6 million ($26.1 million as of 31 December 2011). Revenue from investments for 2012 was $0.04 million (2011: $0.06 million), reflecting the low interest rate environment.

G. Climate Change Fund

The Climate Change Fund was established in April 2008 to facilitate greater investments in DMCs to address the causes and consequences of climate change alongside ADB’s assistance in related sectors.

ADB MANAGEMENT’S DISCUSSION AND ANALYSIS: 31 DECEMBER 2012

33

Contributed resources. ADB provided the initial contribution of $40.0 million in May 2008, as part of OCR’s 2007 net income allocation. In May 2010, $10.0 million was transferred to the fund from OCR allocable net income. As of 31 December 2012, the fund’s resources totaled $51.2 million, of which $43.3 million had been utilized, leaving an uncommitted balance of $7.9 million ($14.2 million as of 31 December 2011).

Operations. In 2012, net TA and/or grant expenses totaled $6.0 million (2011: $4.6 million), comprising seven TAs and one grant totaling $7.0 million that became effective, and a $1.0 million write-back for financially completed and/or cancelled projects (2011: two TA projects, two grants, and one supplementary TA approval totaling $5.1 million and $0.4 million write-back). The balance of undisbursed commitments net of grant and/or TA advances as of 31 December 2012 amounted to $25.0 million, compared with $23.7 million as of the end of 2011.

Investment position . As of 31 December 2012, the total investment portfolio amounted to $32.7 million ($37.7 million as of 31 December 2011). With the lower yield from US dollar placements, revenue from investments decreased to $0.06 million in 2012 (2011: $0.08 million).

H. Asia Pacific Disaster Response Fund

The Asia Pacific Disaster Response Fund was established on 1 April 2009 to provide timely incremental grant resources to DMCs affected by natural disasters.

Contributed resources. In May 2009, $40.0 million was transferred from the ATF as the initial resources of the Asia Pacific Disaster Response Fund. With accumulated income from investment and other sources of $0.2 million, total resources of the fund as of 31 December 2012 amounted to $40.2 million, of which $29.9 million had been utilized, leaving an uncommitted balance of $10.3 million ($12.4 million as of 31 December 2011).

Operations. In 2012, two grants totaling $2.0 million became effective (2011: five grants totaling $15.0 million). The balance of undisbursed commitments net of grant advances as of 31 December 2012 amounted to $0.02 million (2011: $3.1 million).

Investment position . As of 31 December 2012, the total investment portfolio amounted to $7.2 million ($11.2 million as of 31 December 2011). Total revenue from investments for 2012 was $0.01 million (2011: $0.03 million).

IV. GRANT COFINANCING

Trust funds and project-specific grants are key instruments to mobilize and channel financial resources from external sources to finance TA and components of investment projects. They play an important role in complementing ADB’s own resources. Multilateral, bilateral, and private sector partners have contributed about $4.8 billion in grants to ADB operations (Table 22). In 2012, grant cofinancing for ADB-approved projects totaled $430.1 million, comprising $146.8 million for 129 TA projects and $283.3 million for components of 36 investment projects.

By the end of 2012, ADB was administering 36 trust funds, comprising 29 stand-alone trust funds[11] and 7 trust funds established under financing partnership facilities. Of these, 22 have balances totaling $363.4 million in grants. Additional grant resources from external partners totaled $305.7 million in 2012, comprising $156.8 million in replenishments to existing trust

11 Trust funds not related to financing partnership facilities and including the Japan Scholarship Program.

ADB MANAGEMENT’S DISCUSSION AND ANALYSIS: 31 DECEMBER 2012

34

funds, $92.6 million in additional allocation from global funding initiatives[12] and $56.3 million in new contributions.

Financing partners provided the following replenishments to trust funds:

• (i) $3.2 million from the Government of Australia for the Australia – ADB South Asia Development Partnership Facility;

• (ii) $20.0 million from the People’s Republic of China for the People’s Republic of China Regional Cooperation and Poverty Reduction Fund;

• (iii) $1.3 million from the Government of France for the Cooperation Fund for Project Preparation in the Greater Mekong Subregion and in Other Specific Asian Countries;

• (iv) $116.5 million from the Government of Japan for the Afghanistan Infrastructure Trust Fund, Japan Fund for Poverty Reduction, and Japan Scholarship Program;

• (v) $7.8 million from the Government of the Republic of Korea for the e-Asia and Knowledge Partnership Fund;

• (vi) $1.9 million from the Government of Luxembourg for the Financial Sector Development Partnership Fund; and

• (vii) $6.1 million from the Government of Sweden for the Multi-Donor Clean Energy Fund under the Clean Energy Financing Partnership Facility.

Additional allocations from global funding initiatives comprised $45.2 million from the Climate Investment Funds, $24.5 million from the Global Agriculture and Food Security Program, and $22.9 million from the Global Environment Facility.

The United Kingdom became a new contributor to the Carbon Capture and Storage Fund under the Clean Energy Financing Partnership Facility with an initial contribution of $56.3 million.

Japan Fund for Poverty Reduction. The Government of Japan established the Japan Fund for Poverty Reduction (JFPR) in May 2000 to provide grants for projects supporting poverty reduction and related social development activities that can add value to projects financed by ADB. In 2011, the JFPR expanded its scope of grant assistance to provide TA grants in addition to project grants. As of the end of 2012, JFPR funds totaled about $561.6 million. The Government of Japan had approved 161 grant projects (equivalent to $427.0 million) and 124 TA projects (equivalent to $128.7 million) of which ADB had subsequently approved 154 grant projects (equivalent to $413.5 million) and 111 TA projects (equivalent to $110.6 million) funded by JFPR.

Japan Scholarship Program. The Government of Japan established the Japan Scholarship Program (JSP) in 1988 to provide an opportunity for well-qualified citizens of DMCs to undertake postgraduate studies in economics, management, science and technology, and other development-related fields at selected educational institutions in Asia and the Pacific.

Between 1988 and 2012, Japan has contributed $134.8 million and 2,968 scholarships were awarded to recipients from 35 member countries. Of the total, 2,626 have completed their courses. Women have received 1,047 scholarships. An average of 150 new scholarships a year have been awarded in the past 10 years. As of 2012, JSP has 27 participating institutions in 10 countries.

12 In addition, the Climate Investment Funds allocated $228.5 million for loans.

ADB MANAGEMENT’S DISCUSSION AND ANALYSIS: 31 DECEMBER 2012

35

Table 22: Schedule of Contributions and Net Assets Grants from External Sources

As of 31 December 2012

($ million)

Item Contribution Net Assetsa Administered by ADB Country Australia 526.2 119.0 Austria 15.7 3.5 Belgium 49.4 44.2 Brunei Darussalam 5.9 5.7 Cambodia 0.1 0.1 Canada 131.1 9.9 People’s Republic of China 240.1 225.3 Denmark 46.5 3.1 European Community 271.0 15.1 Finland 86.2 33.7 France 35.6 3.3 Germany 0.1 0.0 India 1.0 (0.0) Indonesia 12.6 12.8 Ireland 2.4 0.3 Italy 2.2 – Japan 1,087.5 460.2 Republic of Korea 161.4 132.4 Lao People’s Democratic Republic 0.1 0.1 Luxembourg 19.9 12.2 Malaysia 12.6 12.8 Myanmar 0.1 0.1 Netherlands 357.4 38.0 New Zealand 29.1 5.0 Norway 143.6 17.1 Philippines 12.6 12.8 Portugal 8.7 7.9 Singapore 12.6 12.8 Spain 47.7 28.0 Sweden 244.3 70.6 Switzerland 43.3 17.6 Thailand 12.6 12.8 United Kingdom and Northern Ireland 531.6 133.5 United States 2.9 0.1 Viet Nam 1.1 1.1 Subtotal 4,155.3 1,451.5	Item Contribution Net Assetsa
	Others Cities Alliance 0.5 0.0 Clean Technology Fund 207.8 193.5 Fourth High Level Forum on Aid Effectiveness Trust Fund 0.2 0.0 Future Carbon Fund 35.0 33.3 Global Agriculture and Food Security Program 26.4 1.9 Global Environment Fund 163.9 17.2 Special Climate Change Fund 3.8 0.0 International Fund for Agricultural Development 0.5 (0.0) Islamic Financial Services Board 0.3 – Kreditanstalt für Wiederaufbau (KfW) 0.4 (0.0) Nordic Development Fund 18.3 0.2 Private Sector and Foundations 4.6 0.2 Public Private Infrastructure Advisory Facility 0.6 0.0 Strategic Climate Fund 102.4 54.0 Trust Fund for Forest 16.4 0.4 United Nations Children Fund 0.2 – United Nation Development Programme 111.0 –
	Subtotal 692.2 300.9
	Grand Total 4,847.5 1,752.4

• = nil, ( ) = negative, ADB = Asian Development Bank. Notes:

• Numbers may not sum precisely because of rounding.

• 0.0 = amount less than $0.05 million.

a Excludes projects approved but not yet effective.

ADB MANAGEMENT’S DISCUSSION AND ANALYSIS: 31 DECEMBER 2012

36 Appendix

ORDINARY CAPITAL RESOURCES CONDENSED MANAGEMENT REPORTING BALANCE SHEETS

As of 31 December 2012 and 2011

($ thousand)

	($ thousand)
Item	2011 Statutory Reporting Basis Adjustmentsa Management Reporting Basis Management Reporting Basis 2012
Due from banks Investments Securities transferred under repurchase agreements Securities purchased under resale arrangements Loans outstanding Allowance for loan losses and unamortized net loan origination costs Equity investments Acrrued interest receivable	263,441 – 263,441 187,989
	23,778,015 – 23,778,015 21,508,269
	347,453 – 347,453 330,044
	333,884 – 333,884 395,498
	52,813,634 – 52,813,634 49,729,389
	23,511 – 23,511 29,871
	949,261 (85,567) 863,694 893,715
Investments Loans	108,216 – 108,216 117,516 201,569 – 201,569 181,423
Receivable from swaps Borrowings Others Other assets
	32,418,962 (4,675,921) 27,743,041 26,813,618
	9,171,987 (106,482) 9,065,505 6,091,307
	2,514,929 790,906 3,305,835 2,845,114
TOTAL	122,924,862 (4,077,064) 118,847,798 109,123,753
Borrowings Accrued interest on borrowings Payable for swaps Borrowings Others Payable for swap related collateral Payable under securities repurchase agreements Accounts payable and other liabilities	64,297,062 (1,757,956) 62,539,106 57,336,518
	482,716 482,716 556,423
	28,173,269 (2,860,496) 25,312,773 24,293,752
	8,979,653 (207,902) 8,771,751 6,297,136
	2,155,150 – 2,155,150 1,942,954
	350,416 – 350,416 330,820
	2,066,592 – 2,066,592 1,626,244
Total Liabilities	106,504,858 (4,826,354) 101,678,504 92,383,847
Paid-in capital Net notional maintenance of value receivable Ordinary reserve Special reserve Loan loss reserve Surplus Cumulative revaluation adjustments account Net incomeb Accumulated other comprehensive loss	5,218,988 790,906 6,009,894 5,236,772
	(887,846) – (887,846) (595,806) 10,888,453 (2,382) 10,886,071 10,459,108 264,330 – 264,330 245,948 193,800 – 193,800 200,100 1,131,756 – 1,131,756 1,131,756 284,182 (284,182) – – 124,117 322,250 446,367 570,853 (797,776) (77,302) (875,078) (508,825)
Total Equity	16,420,004 749,290 17,169,294 16,739,906
TOTAL	122,924,862 (4,077,064) 118,847,798 109,123,753

– = nil, ( ) = negative.

a Includes reversal of ASC 815 and 825 effects, Asian Development Bank’s share in unrealized gains or losses from equity investments accounted under the equity method, and nonnegotiable, and noninterest-bearing demand obligations on account of subscribed capital. b Net income after appropriation of guarantee fees to the Special Reserve.

ADB MANAGEMENT’S DISCUSSION AND ANALYSIS: 31 DECEMBER 2012

Financial Statements

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39

ORDINARY CAPITAL RESOURCES MANAGEMENT’S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING

The management of Asian Development Bank (“ADB”) is responsible for establishing and maintaining adequate internal control over financial reporting. ADB’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles in the United States of America.

ADB’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of ADB; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles in the United States of America, and that receipts and expenditures of ADB are being made only in accordance with authorizations of management and directors of ADB; and (iii) provide reasonable assurance regarding prevention or timely detection and correction of unauthorized acquisition, use, or disposition of ADB’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 misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

ADB’s management assessed the effectiveness of ADB’s internal control over financial reporting as of 31 December 2012. In making this assessment, ADB’s management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission in Internal Control – Integrated Framework. Based on that assessment, management believes that as of 31 December 2012, ADB’s internal control over financial reporting is effective based upon the criteria established in Internal Control – Integrated Framework.

Haruhiko Kuroda President Thierry de Longuemar Vice-President (Finance and Risk Management)

Simon T. Bradbury Controller

8 March 2013

40

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Deloitte & Touche LLP Certified Public Accountants Unique Entity No. T08LL0721A 6 Shenton Way, Tower Two #32-00 Singapore 068809

Tel: +65 6224 8288 Fax: +65 6538 6166 www.deloitte.com

INDEPENDENT AUDITORS’ REPORT

To the Board of Directors and the Board of Governors of Asian Development Bank

We have audited management's assertion, included in the accompanying Management’s Report on Internal Control over Financial Reporting, that Asian Development Bank ("ADB") maintained effective internal control over financial reporting as of December 31, 2012, based on the criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. ADB's management is responsible for maintaining effective internal control over financial reporting and for its assertion of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on management's assertion based on our audit.

We conducted our audit in accordance with attestation standards established by the American Institute of Certified Public Accountants. 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. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

ADB’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with accounting principles generally accepted in the United States of America. ADB'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 ADB; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with accounting principles generally accepted in the United States of America, and that receipts and expenditures of ADB are being made only in accordance with authorizations of management and directors of ADB; and (3) provide reasonable assurance regarding prevention or timely detection and correction of unauthorized acquisition, use, or disposition of ADB’s assets that could have a material effect on the financial statements.

41

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Because of the inherent limitations of internal control over financial reporting, including the possibility of collusion or improper management override of controls, material misstatements due to error or fraud may not be prevented or detected and corrected on a timely basis. Also, projections of any evaluation of the effectiveness of the internal control over financial reporting to future periods are subject to the risk that the controls may become inadequate because of changes in conditions or that the degree of compliance with the policies or procedures may deteriorate.

In our opinion, management’s assertion that ADB maintained effective internal control over financial reporting as of December 31, 2012, is fairly stated, in all material respects, based on the criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission.

We have also audited, in accordance with auditing standards generally accepted in the United States of America, the accompanying balance sheet of Asian Development Bank (“ADB”) – Ordinary Capital Resources as of December 31, 2012 and 2011 and the related statements of income and expenses, comprehensive (loss) income, changes in capital and reserves and cash flows, for the years then ended and the related notes to the financial statements. Our report dated March 8, 2013 expressed an unqualified opinion on those financial statements.

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Public Accountants and Certified Public Accountants

Singapore March 8, 2013

42

==> picture [149 x 29] intentionally omitted <==

Deloitte & Touche LLP Certified Public Accountants Unique Entity No. T08LL0721A 6 Shenton Way, Tower Two #32-00 Singapore 068809

Tel: +65 6224 8288 Fax: +65 6538 6166 www.deloitte.com

INDEPENDENT AUDITORS’ REPORT

To the Board of Directors and the Board of Governors of Asian Development Bank

We have audited the accompanying financial statements of Asian Development Bank (“ADB”) – Ordinary Capital Resources, which comprise the balance sheets as of December 31, 2012 and 2011, and the related statements of income and expenses, comprehensive (loss) income, changes in capital and reserves, and cash flows for the years then ended, 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 accounting principles generally accepted in the United States of America; 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.

An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditor’s 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.

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Opinion

In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of ADB - Ordinary Capital Resources as of December 31, 2012 and 2011, and the results of its operations and its cash flows for the years then ended in accordance with accounting principles generally accepted in the United States of America.

Report on Management’s Assertion on Internal Control over Financial Reporting

We have also audited, in accordance with attestation standards established by the American Institute of Certified Public Accountants, management’s assertion that ADB maintained effective internal control over financial reporting as of December 31, 2012, based on the criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated March 8, 2013 expressed an unqualified opinion on management’s assertion that ADB maintained effective internal control over financial reporting.

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Public Accountants and Certified Public Accountants

Singapore March 8, 2013

44

ASIAN DEVELOPMENT BANK—ORDINARY CAPITAL RESOURCES BALANCE SHEET

31 December 2012 and 2011

Expressed in Thousands of United States Dollars

ASIAN DEVELOPMENT BANK—ORDINARY CAPITAL RESOURCES BALANCE SHEET 31 December 2012 and 2011 Expressed in Thousands of United States Dollars	ASIAN DEVELOPMENT BANK—ORDINARY CAPITAL RESOURCES BALANCE SHEET 31 December 2012 and 2011 Expressed in Thousands of United States Dollars
A S S E T S
DUE FROM BANKS (Note C) INVESTMENTS (Notes C, D, L, and P) Government or government-guaranteed obligations Time deposits Other securities SECURITIES TRANSFERRED UNDER REPURCHASE AGREEMENTS (Notes D and P) SECURITIES PURCHASED UNDER RESALE ARRANGEMENTS (Notes D and P) LOANS OUTSTANDING (OCR-6) (Notes A, E, and P) (Including net unamortized loan origination costs of $66,044 – 2012 and $64,901 – 2011) Sovereign Nonsovereign Less—allowance for loan losses EQUITY INVESTMENTS (Notes A, G, and P) ACCRUED INTEREST RECEIVABLE Investments Loans RECEIVABLE FROM SWAPS (Notes H and P) Borrowings Others OTHER ASSETS Property, furniture, and equipment (Note I) Investment related receivables (Note D) Swap related collateral (Notes H and P) Miscellaneous (Notes N and P)	263,441 $ 21,696,501 $ 1,311,006 770,508 23,778,015 347,453 333,884 49,937,141 2,942,537 52,879,678 42,533 52,837,145 949,261 108,216 201,569 309,785 32,418,962 9,171,987 41,590,949 159,865 8,156 2,155,150 191,758 2,514,929 2012	2011
		187,989 $ 19,156,304 $ 1,151,963 1,200,002 21,508,269 330,044 395,498 47,052,649 2,741,641 49,794,290 35,030 49,759,260 970,622 117,516 181,423 298,939 31,373,104 6,220,207 37,593,311 161,451 2,428 1,942,954 159,290 2,266,123

The accompanying notes are an integral part of these financial statements (OCR-9).

$ 122,924,862 $ 113,310,055

TOTAL

45

OCR-1

LIABILITIES, CAPITAL, AND RESERVES

BORROWINGS (OCR-7) (Notes H, J, and P) At amortized cost At fair value ACCRUED INTEREST Borrowings at amortized cost Borrowings at fair value PAYABLE FOR SWAPS (Notes H, J, and P) Borrowings Others PAYABLE UNDER SECURITIES REPURCHASE AGREEMENTS ACCOUNTS PAYABLE AND OTHER LIABILITIES Investment related payables (Note D) Payable for swap related collateral (Notes H and P) Accrued pension and postretirement medical benefit costs (Note O) Miscellaneous (Notes F, I, N, and P) TOTAL LIABILITIES CAPITAL AND RESERVES (OCR-4) Capital stock (OCR-8) (Note K) Authorized (SDR106,389,330,000 – 2012 and 2011) Subscribed (SDR106,140,168,000 – 2012; SDR105,835,800,000 – 2011) Less—“callable” shares subscribed “Paid-in” shares subscribed Less—subscription installments not due Subscription installments matured Less—capital transferred to the Asian Development Fund and discount Nonnegotiable, noninterest-bearing demand obligations on account of subscribed capital (Note K) Net notional amounts required to maintain value of currency holdings (Note K) Ordinary reserve (Note L) Special reserve (Note L) Loan loss reserve (Note L) Surplus (Note L) Cumulative revaluation adjustments account (Note L) Net income after appropriation (OCR-4) (Note L) Accumulated other comprehensive loss (Note L)	5,734,033 $ 58,563,029 64,297,062 $ 47,041 435,675 482,716 28,173,269 8,979,653 37,152,922 350,416 11,187 2,155,150 1,875,993 179,412 4,221,742 106,504,858 163,128,947 154,950,511 8,178,436 2,082,133 6,096,303 86,409 6,009,894 (790,906) 5,218,988 (887,846) 10,888,453 264,330 193,800 1,131,756 284,182 124,117 (797,776) 16,420,004 2012	2011
		4,240,356 $ 54,037,988 58,278,344 $ 48,116 508,307 556,423 27,465,365 6,576,366 34,041,731 330,820 2,321 1,942,954 1,472,179 151,744 3,569,198
		96,776,516 162,486,521 154,335,557 8,150,964 2,828,710 5,322,254 85,482 5,236,772 (578,991) 4,657,781 (595,806) 10,459,995 245,948 200,100 1,131,756 261,300 593,735 (421,270) 16,533,539

TOTAL $ 122,924,862 $ 113,310,055

46

OCR-2

ASIAN DEVELOPMENT BANK—ORDINARY CAPITAL RESOURCES STATEMENT OF INCOME AND EXPENSES For the Years Ended 31 December 2012 and 2011 Expressed in Thousands of United States Dollars

REVENUE (Note M) From loans (Note E) Interest 765,954 $ Commitment charge 48,576 Other (44,044) 770,486 $ From investments (Note D) Interest 390,185 From guarantees (Note F) 18,382 From equity investments 38,477 From other sources—net (Notes E and Q) 20,512 TOTAL REVENUE 1,238,042 $ EXPENSES (Note M) Borrowings and related expenses (Note J) 520,369 Administrative expenses (Note M) (Including amortization of estimated actuarial losses and prior service costs reclassified from other comprehensive income of $62,524 – 2012 and $46,092 – 2011) 351,144 Provison for loan losses (Write back) (Note E) 6,889 Other expenses 8,642 TOTAL EXPENSES 887,044 NET REALIZED GAINS (LOSSES) From investments (Note D) (Including gains reclassified from other comprehensive income of $16,522 – 2012 and $59,935 – 2011) 16,842 From equity investments (Note M) (Including gains reclassified from other comprehensive income of $88,062 – 2012 and $110,845 – 2011) 79,778 From borrowings 16,229 Others (Note D) (Including gains reclassified from other comprehensive income of $9,425 – 2012 and $935 – 2011) 9,563 NET REALIZED GAINS 122,412 NET UNREALIZED (LOSSES) GAINS (Note M) (330,911) 2012	REVENUE (Note M) From loans (Note E) Interest 765,954 $ Commitment charge 48,576 Other (44,044) 770,486 $ From investments (Note D) Interest 390,185 From guarantees (Note F) 18,382 From equity investments 38,477 From other sources—net (Notes E and Q) 20,512 TOTAL REVENUE 1,238,042 $ EXPENSES (Note M) Borrowings and related expenses (Note J) 520,369 Administrative expenses (Note M) (Including amortization of estimated actuarial losses and prior service costs reclassified from other comprehensive income of $62,524 – 2012 and $46,092 – 2011) 351,144 Provison for loan losses (Write back) (Note E) 6,889 Other expenses 8,642 TOTAL EXPENSES 887,044 NET REALIZED GAINS (LOSSES) From investments (Note D) (Including gains reclassified from other comprehensive income of $16,522 – 2012 and $59,935 – 2011) 16,842 From equity investments (Note M) (Including gains reclassified from other comprehensive income of $88,062 – 2012 and $110,845 – 2011) 79,778 From borrowings 16,229 Others (Note D) (Including gains reclassified from other comprehensive income of $9,425 – 2012 and $935 – 2011) 9,563 NET REALIZED GAINS 122,412 NET UNREALIZED (LOSSES) GAINS (Note M) (330,911) 2012	2011	2011
		664,313 $ 50,814 (65,528) 649,599 $ 365,263 15,722 44,030 20,439 1,095,053 $ 367,916 315,945 (7,395) 4,938 681,404 84,306 120,614 5,497 (20,292) 190,125 5,683
NET INCOME	142,499 $		609,457 $

The accompanying notes are an integral part of these financial statements (OCR-9).

47

OCR-3

ASIAN DEVELOPMENT BANK—ORDINARY CAPITAL RESOURCES STATEMENT OF COMPREHENSIVE (LOSS) INCOME For the Years Ended 31 December 2012 and 2011 Expressed in Thousands of United States Dollars

NET INCOME (OCR-2) Other comprehensive loss (Note L) Reclassification to net income: Defined benefit plans	2012 142,499 $	2011
		609,457 $
Net actuarial loss during the period	(392,514)	(307,697)
Amortization of net actuarial losses Amortization of prior service cost Currency translation adjustments Unrealized investment holding losses Unrealized investment holding gains during the period Reclassification adjustments for gains included in net income Total other comprehensive loss	62,524 – (38,042) 105,535 (114,009) (376,506)	45,127 965 18,358 47,037 (171,715)
		(367,925)
COMPREHENSIVE (LOSS) INCOME	(234,007) $	241,532 $

The accompanying notes are an integral part of these financial statements (OCR-9).

48

OCR-4

ASIAN DEVELOPMENT BANK—ORDINARY CAPITAL RESOURCES STATEMENT OF CHANGES IN CAPITAL AND RESERVES For the Years Ended 31 December 2012 and 2011

Expressed in Thousands of United States Dollars (Note K)

			Nonnegotiable,	Nonnegotiable,											Cumulative	Cumulative			Accumulated	Accumulated
				Noninterest-	Net Notional										Revaluation			Net Income		Other
		Capital	bearing Demand		Maintenance			Ordinary		Special	Loan Loss				Adjustments			After	Comprehensive
		Stock		Obligations		of Value		Reserve		Reserve		Reserve		Surplus		Account	Appropriations			Loss		Total
Balance, 1 January 2011	$	4,255,678	$	(341,130)	$	(419,186)	$	10,030,460	$	230,226	$	246,000	$	1,131,756	$	183,521	$	614,489	$	(53,345)	$	15,878,469
Comprehensive income
for the year 2011 (OCR-3) (Note		L)																609,457		(367,925)		241,532
Appropriation of guarantee fees
to Special Reserve (Note L)										15,722								(15,722)				–
Change in SDR value of
paid-in shares subscribed		202,085																				202,085
Change in subscription
installments not due		193,663																				193,663
Additional paid-in shares
subscribed during the year		585,119																				585,119
Change in SDR value of
capital transferred to
Asian Development Fund		227																				227
Change in notional
maintenance of value (Note K)						(176,620)																(176,620)
Demand obligations on account
of subscription received
during the year				(263,627)																		(263,627)
Encashment of demand
obligations during the year				18,171																		18,171
Change in US Dollar value
of demand obligations				7,595																		7,595
Allocation of prior year income
to ordinary reserve, loan
loss reserve, surplus and
transfer from cumulative
revaluation account (Note L)								422,610				(45,900)		–		77,779		(454,489)				–
Allocation of prior year income to	ADF,
TASF, RCIF and CCF (Note L)																		(160,000)				(160,000)
Charge to ordinary reserve for
change in SDR value of
capital stock (Note L)								6,925														6,925
Balance, 31 December 2011	$	5,236,772	$	(578,991)	$	(595,806)	$	10,459,995	$	245,948	$	200,100	$	1,131,756	$	261,300	$	593,735	$	(421,270)	$	16,533,539
Comprehensive loss
for the year 2012 (OCR-3) (Note		L)																142,499		(376,506)		(234,007)
Appropriation of guarantee fees
to Special Reserve (Note L)										18,382								(18,382)				–
Change in SDR value of
paid-in shares subscribed		170,977																				170,977
Change in subscription
installments not due		588,195																				588,195
Additional paid-in shares
subscribed during the year		14,029																				14,029
Change in SDR value of
capital transferred to
Asian Development Fund		(79)																				(79)
Change in notional
maintenance of value (Note K)						(292,040)																(292,040)
Demand obligations on account
of subscription received
during the year				(263,277)																		(263,277)
Encashment of demand
obligations during the year				30,758																		30,758
Change in US Dollar value
of demand obligations				20,604																		20,604
Allocation of prior year income
to ordinary reserve, loan
loss reserve, surplus and
transfer from cumulative
revaluation account (Note L)								417,153				(6,300)				22,882		(433,735)				–
Allocation of prior year income to	ADF
and TASF (Note L)																		(160,000)				(160,000)
Charge to ordinary reserve for
change in SDR value of
capital stock (Note L)								4,540														4,540
Return of unutilized amount from
ATF to ordinary reserve (Note L)								6,765														6,765
Balance, 31 December 2012	$	6,009,894	$	(790,906)	$	(887,846)	$	10,888,453	$	264,330	$	193,800	$	1,131,756	$	284,182	$	124,117	$	(797,776)	$	16,420,004

The accompanying notes are an integral part of these financial statements (OCR-9).

49

OCR-5

ASIAN DEVELOPMENT BANK—ORDINARY CAPITAL RESOURCES STATEMENT OF CASH FLOWS For the Years Ended 31 December 2012 and 2011 Expressed in Thousands of United States Dollars

CASH FLOWS FROM OPERATING ACTIVITIES Interest and other charges on loans received Interest on investments received Interest paid for securities purchased under resale/repurchase arrangements Interest and other financial expenses paid Administrative expenses paid Others—net Net Cash Provided by Operating Activities CASH FLOWS FROM INVESTING ACTIVITIES Sales of investments Maturities of investments Purchases of investments Receipts from future contracts Payments for future contracts Receipts from securities purchased under resale arrangements Payments for securities purchased under resale arrangements Principal collected on loans Loans disbursed Receipts from swaps Payments for swaps Property, furniture, and equipment acquired Change in swap related collateral Purchases of equity investments Sales of equity investments Net Cash Used in Investing Activities CASH FLOWS FROM FINANCING ACTIVITIES Proceeds from new borrowings Borrowings redeemed Matured capital subscriptions collected1 Issuance expenses paid Demand obligations of members encashed Receipts from swaps Resources transferred from ATF Resources transferred to ADF Resources transferred to TASF Net Cash Provided by Financing Activities Effect of Exchange Rate Changes on Due from Banks Net Increase in Due from Banks Due from Banks at Beginning of Year Due from Banks at End of Year RECONCILIATION OF NET INCOME TO NET CASH PROVIDED BY OPERATING ACTIVITIES: Net Income (OCR-2) Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization Provision for losses charged (written back)—net Net realized gains from investments, equity investments and other borrowings Proportionate share in earnings on equity investments Net unrealized gains (losses) Change in accrued revenue from loans, investments and other swaps Change in receivable from ADF - allocation of administrative expenses Change in accrued interest on borrowings and swaps, and other expenses Change in pension and postretirement benefit liability Others—net Net Cash Provided by Operating Activities	2012 687,722 $ 398,198 (1,090) (517,015) (246,175) 31,395 353,035 755,643 160,337,428 (164,332,550) – – 113,434,417 (113,414,676) 3,258,201 (6,704,722) 274,316 – (21,913) 212,020 (112,588) 244,915 (6,069,509) 18,432,844 (13,219,447) 335,859 (27,481) 30,758 388,451 6,765 (120,000) (40,000) 5,787,749 4,177 75,452 187,989 263,441 $ 142,499 $ 62,530 6,889 (122,796) (33,592) 330,911 (72,414) 3,535 364,535 (329,990) 928 353,035 $	2011
		563,092 $ 400,085 (1,342) (326,928) (260,447) 42,431
		416,891
		4,941,371 164,772,539 (173,155,127) 31 (587) 107,137,925 (107,213,436) 2,779,465 (6,285,444) 89,928 (238,033) (19,217) 354,568 (76,664) 207,424
		(6,705,257)
		13,908,636 (8,247,534) 496,027 (31,800) 18,171 382,937 – (120,000) (40,000)
		6,366,437
		(4,730)
		73,341 114,648
		187,989 $
		609,457 $ 90,655 (7,395) (212,527) (28,989) (5,683) (84,538) (12,798) 307,446 (261,605) 22,868
		416,891 $

Supplementary disclosure of noncash financing activities:

1 Nonnegotiable, noninterest-bearing demand promissory notes amounting to $263,265 ($261,336 – 2011) were received from members. The accompanying notes are an integral part of these financial statements (OCR-9).

50

ASIAN DEVELOPMENT BANK—ORDINARY CAPITAL RESOURCES SUMMARY STATEMENT OF LOANS

31 December 2012 and 2011

Expressed in Thousands of United States Dollars

Borrowers/Guarantors	Loans Outstanding1	Undisbursed Balances of Effective Loans2	Loans Not Yet Effective3	Total Loans	Percent of Total Loans
Afghanistan Armenia Azerbaijan Bangladesh Bhutan Cambodia People’s Republic of China Cook Islands Fiji Georgia India Indonesia Kazakhstan Republic of Korea Kyrgyz Republic Lao People’s Democratic Republic Malaysia Maldives Marshall Islands Federated States of Micronesia Mongolia Nauru Pakistan Palau Papua New Guinea Philippines Sri Lanka Thailand Timor-Leste Turkmenistan Uzbekistan Viet Nam Regional TOTAL – 31 December 2012 Allowance for loan losses Unamortized loan origination cost—net NET BALANCE – 31 December 2012 Made up of: Sovereign Loans Nonsovereign Loans Private Sector Public Sector Net Balance – 31 December 2012 TOTAL – 31 December 2011 Allowance for loan losses Unamortized loan origination cost—net NET BALANCE – 31 December 2011 Made up of: Sovereign Loans Nonsovereign Loans Private Sector Public Sector Net Balance – 31 December 2011	24,706 $ 88,570 396,455 1,661,580 50,126 1,992 13,133,269 22,803 133,791 143,900 11,492,187 9,556,257 1,136,007 15,180 – 58,350 113,549 4,773 1,677 3,144 2,357 292 5,245,677 6,400 174,830 5,260,209 917,428 610,295 10 35,147 847,741 1,639,951 52,778,653 34,981 52,813,634 (42,533) 66,044 52,837,145 $ 49,937,141 $ 2,612,915 287,089 52,837,145 $ 49,729,390 $ (35,030) 64,900 49,759,260 $ 47,052,649 $ 2,485,257 221,354 49,759,260 $	– $ 176,430 656,054 1,035,413 874 – 4,679,081 527 30,467 197,600 5,740,325 970,144 454,242 – 10,000 – – – – 1,591 – – 1,756,582 6,200 229,780 466,786 632,159 354,175 30,840 81,735 1,240,014 3,031,334 21,782,353 10,019 21,792,372 – – 21,792,372 $ 20,069,785 $ 1,166,346 556,241 21,792,372 $ 18,475,982 $ – – 18,475,982 $ 18,059,010 $ 386,972 30,000 18,475,982 $	– $ 10,000 250,000 873,100 – – 1,885,606 5,944 – 20,000 1,942,276 292,750 591,300 – – 448,200 – – – – 29,700 – 343,100 – – 400,000 200,000 5,887 – – 238,000 1,132,080 8,667,943 40,000 8,707,943 – – 8,707,943 $ 7,439,073 $ 1,213,722 55,148 8,707,943 $ 9,873,907 $ – – 9,873,907 $ 7,729,810 $ 1,509,797 634,300 9,873,907 $	24,706 $ 275,000 1,302,509 3,570,093 51,000 1,992 19,697,956 29,274 164,258 361,500 19,174,788 10,819,151 2,181,549 15,180 10,000 506,550 113,549 4,773 1,677 4,735 32,057 292 7,345,359 12,600 404,610 6,126,995 1,749,587 970,357 30,850 116,882 2,325,755 5,803,365 83,228,949 85,000 83,313,949 (42,533) 66,044 83,337,460 $ 77,445,999 $ 4,992,983 898,478 83,337,460 $ 78,079,279 $ (35,030) 64,900 78,109,149 $ 72,841,469 $ 4,382,026 885,654 78,109,149 $	0.03 0.33 1.56 4.28 0.06 0.00 23.64 0.04 0.20 0.43 23.02 12.99 2.62 0.02 0.01 0.61 0.14 0.00 0.00 0.00 0.04 0.00 8.82 0.02 0.49 7.35 2.10 1.16 0.04 0.14 2.79 6.97
					99.90 0.10
					100.00

1 Amounts outstanding on the multicurrency fixed lending rate loans totaled $5,685 ($11,488 – 2011), on pool-based loans totaled $5,694,794 ($7,108,319 – 2011) and on LIBOR-based loans and market-based loans totaled $47,113,155 ($42,609,582 – 2011). The average yield on loans was 1.56% (1.34% – 2011).

2 Refer to the unwithdrawn portions of effective loans as of 31 December 2012. Of the undisbursed balances, ADB has made irrevocable commitments to disburse various amounts totaling $635,212 ($546,656 – 2011).

3 Refer to approved loans that have not become effective as of 31 December 2012, pending borrowers’ compliance with effectiveness conditions specified in the loan regulations and the loan agreements.

The accompanying notes are an integral part of these financial statements (OCR-9).

51

OCR-6

MATURITY OF EFFECTIVE LOANS

Twelve Months Ending 31 December 2013 2014 2015 2016 2017	Amount 4,666,684 $ 4,539,577 3,826,991 4,468,541 4,111,808	Five Years Ending 31 December 2022 2027 2032 2037 over 2037 Total	Amount
			19,580,215 15,666,972 11,998,043 5,263,726 483,449
			74,606,006 $

SUMMARY OF CURRENCIES RECEIVABLE ON LOANS OUTSTANDING

Currency		2012		2011
Chinese yuan	$	259,390	$	266,350
Euro		57,947		41,469
Japanese yen		3,400,984		4,512,468
Indian rupee		138,240		171,552
Indonesian rupiah		47,209		37,466
Kazakhstan tenge		147,596		157,586

Currency	2012 2011
Pakistan rupee Philippine peso Swiss franc Thailand baht United States dollar Total	164 177 62,625 67,254 915 1,697 190,070 181,924 48,508,494 44,291,447
	52,813,634 $ 49,729,390 $

52

ASIAN DEVELOPMENT BANK—ORDINARY CAPITAL RESOURCES SUMMARY STATEMENT OF BORROWINGS 31 December 2012 and 2011

Expressed in Thousands of United States Dollars

	Borrowings	Borrowings	Swap Arrangements2	Swap Arrangements2	2012 2011 After Swaps Average Cost (%) Weighted Net Currency Obligation3	2012 2011 After Swaps Average Cost (%) Weighted Net Currency Obligation3	2012 2011 After Swaps Average Cost (%) Weighted Net Currency Obligation3
	Principal Outstanding1		Payable(Receivable)3
	2012	2011	2012	2011	2012
Australian dollar Brazilian real Canadian dollar Chinese yuan Hong Kong dollar Indian rupee Japanese yen Kazakhstan tenge Malaysian ringgit Mexican peso New Zealand dollar Norwegian krone Philippine peso Pound sterling Singapore dollar South African rand Swiss franc Thai baht Turkish lira United States dollar Subtotal Unamortized discounts/ premiums and transition adjustments Accumulated translation adjustments ASC 815 Adjustments Total	10,808,127 $ 1,081,717 1,807,834 539,965 – 91,719 3,251,995 – 175,161 21,414 597,317 521,380 – 1,691,779 – 2,021,508 1,009,838 35,991 3,223,356 37,399,537 64,278,638 18,424 64,297,062 $ 4	9,824,319 $ 1,206,052 1,725,049 520,666 193,501 89,792 3,725,949 8,081 174,927 42,066 374,780 259,744 115,210 1,016,034 193,539 2,683,858 960,481 36,663 1,743,444 33,363,106	(10,919,131) $ (1,079,164) (1,838,015) 51,138 (52,143) – 10,001 (7,093) 2,622,634 (2,836,887) – (176,898) (21,736) (602,607) (526,592) – – (1,693,033) – (2,034,134) (579,639) (36,324) (3,237,274) 25,489,496 (6,778,292)	(9,978,489) $ (1,190,701) (1,801,090) 65,715 (71,656) (195,056) 17,844 (11,754) 3,592,462 (3,390,234) – (178,895) (42,427) (378,702) (262,664) – (115,779) (1,012,810) (195,995) (2,701,508) (565,826) (36,861) (1,759,092) 23,789,344 (7,483,565)	(111,004) $ 2,553 (30,181) 538,960 – 94,627 3,037,742 – (1,737) (322) (5,290) (5,212) – (1,254) – (12,626) 430,199 (333) (13,918) 56,110,741	(154,170) $ 15,351 (76,041) 514,725 (1,555) 95,882 3,928,177 8,081 (3,968) (361) (3,922) (2,920) (569) 3,224 (2,456) (17,650) 394,655 (198) (15,648) 49,668,885 54,349,522 $	0.84 (0.57) 0.64 0.91
		58,257,261 21,083	(4,245,693) $	(3,907,739) $	60,032,945 $
		58,278,344 $

1 Reported at Fair Value upon adoption of ASC 820/825 effective 1 January 2008, except for unswapped borrowings which are reported at net of principal amount and unamortized discount/premium of zero coupon bonds. The aggregate face amounts and discounted values of zero coupon and deep discount borrowings (in United States dollar equivalents) are:

	Currency	Aggregate F	ace Amount	Discount	ed Value
		2012 1,005,144 $ 231,301 802,407 1,203,180 535,245 1,979,939 4,120,710	2011	2012	2011
	Australian dollar Brazilian real Canadian dollar South African rand Swiss franc Turkish lira United States dollar		1,793,937 $ 214,941 783,392 1,308,981 521,544 1,241,471 4,079,042	860,403 $ 193,986 794,662 1,031,956 456,572 1,625,569 2,687,694	1,591,483 $ 174,646 745,089 1,061,010 422,665 967,142 2,947,003

53

OCR-7

MATURITY STRUCTURE OF BORROWINGS OUTSTANDING[5]

Twelve Months Ending 31 December 2013 2014 2015 2016 2017	Amount 13,046,229 $ 11,290,337 11,302,069 9,499,837 8,065,156	Five Years Ending 31 December 2022 2027 2032 2037 over 2037 Total	Amount
			7,976,077 1,628,216 1,468,473 20,668 –
			64,297,062 $

INTEREST RATE SWAP ARRANGEMENTS

Receive Fixed Swaps: Australian dollar8 Chinese yuan Indian rupee United States dollar United States dollar9 Receive Floating Swaps: Japanese yen United States dollar Total	Notional Amount	Average Rate(%) Pay Maturing Receive Floating6 Through7	Average Rate(%) Pay Maturing Receive Floating6 Through7
		Receive
	58,167 $ 266,514 91,224 30,776,156 58,167 58,167 399,000	2.64 3.49 5.40 2.36 2.14 0.55 0.61	(0.04) 2027–2032 3.37 2015–2020 8.83 2014 0.52 2013–2019 (0.06) 2016–2032 (0.07) 2016–2032 0.25 2013–2017
	31,707,395 $

2 Include currency and interest rate swaps. At 31 December 2012, the remaining maturity of swap agreements ranged from less than one year to 25 years. Approximately

• 79.28% of the swap receivables and 81.62% of the payables are due before 1 January 2018.

• 3 Adjusted by the cumulative effect of the adoption of ASC 815 effective 1 January 2001.

• 4 Excludes accrued interest and commission.

• 5 Bonds with put and call options were considered maturing on the first put or call date.

• 6 Represents average current floating rates, net of spread.

• 7 Swaps with early termination date were considered maturing on the first termination date.

• 8 Consists of dual currency swaps with interest receivable in Australian dollar and interest payable in Japanese yen.

• 9 Consists of dual currency swaps with interest receivable in United States dollar and interest payable in Japanese yen.

The accompanying notes are an integral part of these financial statements (OCR-9).

54

ASIAN DEVELOPMENT BANK—ORDINARY CAPITAL RESOURCES STATEMENT OF SUBSCRIPTIONS TO CAPITAL STOCK AND VOTING POWER 31 December 2012

Expressed in Thousands of United States Dollars

MEMBERS		Total Callable Paid-in Par Value Of Shares1 SUBSCRIBED CAPITAL	VOTING POWER
	Number of Percent Shares of Total		Number of Percent Votes of Total
REGIONAL Afghanistan 3,585 0.03 55,099 $ 47,752 $ 7,346 Armenia 31,671 0.30 486,758 462,367 24,391 Australia 614,220 5.79 9,440,070 8,967,974 472,096 Azerbaijan 47,208 0.45 725,549 689,186 36,364 Bangladesh 108,384 1.02 1,665,775 1,582,474 83,301 Bhutan 660 0.01 10,144 9,514 630 Brunei Darussalam 37,386 0.35 574,593 545,806 28,787 Cambodia 5,250 0.05 80,688 73,957 6,732 People’s Republic of China 684,000 6.44 10,512,533 9,986,737 525,796 Cook Islands 282 0.003 4,334 4,119 215 Fiji 7,218 0.07 110,935 105,387 5,548 Georgia 36,243 0.34 557,026 529,131 27,895 Hong Kong, China 57,810 0.55 888,493 844,046 44,448 India 672,030 6.33 10,328,563 9,812,035 516,528 Indonesia 577,705 5.44 8,878,868 8,434,787 444,081 Japan 1,656,630 15.61 25,461,078 24,187,755 1,273,323 Kazakhstan 85,608 0.81 1,315,726 1,249,916 65,811 Kiribati 426 0.004 6,547 6,225 323 Republic of Korea 534,738 5.04 8,218,495 7,807,507 410,988 Kyrgyz Republic 31,746 0.30 487,911 463,504 24,406 Lao People’s Democratic Republic 1,476 0.01 22,685 21,271 1,414 Malaysia 289,050 2.72 4,442,467 4,220,290 222,177 Republic of the Maldives 426 0.004 6,547 6,225 323 Marshall Islands 282 0.003 4,334 4,119 215 Federated States of Micronesia 426 0.004 6,547 6,225 323 Mongolia 1,596 0.02 24,529 23,300 1,230 Myanmar 57,810 0.55 888,493 844,046 44,448 Nauru 426 0.004 6,547 6,225 323 Nepal 15,606 0.15 239,852 227,848 12,003 New Zealand 163,020 1.54 2,505,487 2,380,197 125,290 Pakistan 231,240 2.18 3,553,974 3,376,244 177,729 Palau 342 0.003 5,256 4,995 261 Papua New Guinea 9,960 0.09 153,077 145,439 7,638 Philippines 252,912 2.38 3,887,055 3,692,681 194,374 Samoa 348 0.003 5,348 5,026 323 Singapore 36,120 0.34 555,136 527,379 27,757 Solomon Islands 708 0.01 10,881 10,343 538 Sri Lanka 61,560 0.58 946,128 898,806 47,322 Taipei,China 115,620 1.09 1,776,987 1,688,138 88,849 Tajikistan 30,402 0.29 467,254 443,832 23,423 Thailand 144,522 1.36 2,221,188 2,110,099 111,089 Timor-Leste 1,050 0.01 16,138 15,323 815 Tonga 426 0.004 6,547 6,225 323 Turkmenistan 26,874 0.25 413,032 392,330 20,702 Tuvalu 150 0.001 2,305 2,182 123 Uzbekistan 71,502 0.67 1,098,929 1,043,968 54,960 Vanuatu 708 0.01 10,881 10,343 538 Viet Nam 36,228 0.34 556,795 520,662 36,133			43,189 0.33 71,275 0.54 653,824 4.93 86,812 0.65 147,988 1.12 40,264 0.30 76,990 0.58 44,854 0.34 723,604 5.45 39,886 0.30 46,822 0.35 75,847 0.57 97,414 0.73 711,634 5.36 617,309 4.65 1,696,234 12.78 125,212 0.94 40,030 0.30 574,342 4.33 71,350 0.54 41,080 0.31 328,654 2.48 40,030 0.30 39,886 0.30 40,030 0.30 41,200 0.31 97,414 0.73 40,030 0.30 55,210 0.42 202,624 1.53 270,844 2.04 39,946 0.30 49,564 0.37 292,516 2.21 39,952 0.30 75,724 0.57 40,312 0.30 101,164 0.76 155,224 1.17 70,006 0.53 184,126 1.39 40,654 0.31 40,030 0.30 66,478 0.50 39,754 0.30 111,106 0.84 40,312 0.30 75,832 0.57
Total Regional(Forward) 6,743,590 63.54 103,643,587 98,443,938 5,199,649			8,644,582 65.16

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MEMBERS		Total Callable Paid-in SUBSCRIBED CAPITAL Par Value Of Shares1	VOTING POWER
	Number of Percent Shares of Total		Number of Percent Votes of Total
Total Regional(Forward)	6,743,590 63.54 103,643,587 98,443,938 5,199,649		8,644,582 65.16
NONREGIONAL Austria Belgium Canada Denmark Finland France Germany Ireland Italy Luxembourg Netherlands Norway Portugal Spain Sweden Switzerland Turkey United Kingdom United States	36,120 0.34 555,136 527,379 27,757 36,120 0.34 555,136 527,379 27,757 555,258 5.23 8,533,871 8,107,099 426,772 36,120 0.34 555,136 527,379 27,757 36,120 0.34 555,136 527,379 27,757 247,068 2.33 3,797,238 3,607,336 189,902 459,204 4.33 7,057,598 6,704,644 352,954 36,120 0.34 555,136 527,317 27,818 191,850 1.81 2,948,581 2,801,114 147,467 36,120 0.34 555,136 527,317 27,818 108,882 1.03 1,673,429 1,589,744 83,685 36,120 0.34 555,136 527,379 27,757 12,040 0.11 185,045 172,027 13,018 36,120 0.34 555,136 527,379 27,757 36,120 0.34 555,136 527,379 27,757 61,950 0.58 952,122 904,493 47,629 36,120 0.34 555,136 527,379 27,757 216,786 2.04 3,331,827 3,165,210 166,617 1,656,189 15.60 25,454,293 24,181,242 1,273,051		75,724 0.57 75,724 0.57 594,862 4.48 75,724 0.57 75,724 0.57 286,672 2.16 498,808 3.76 75,724 0.57 231,454 1.75 75,724 0.57 148,486 1.12 75,724 0.57 51,644 0.39 75,724 0.57 75,724 0.57 101,554 0.77 75,724 0.57 256,390 1.93 1,695,793 12.78
Total Nonregional	3,870,427 36.46 59,485,360 56,506,573 2,978,787		4,622,903 34.84
TOTAL	10,614,017 100.00 163,128,947 154,950,511 8,178,436		13,267,485 100.00

Note: Numbers may not sum precisely because of rounding.

1 The authorized capital stock of the ADB has a par value of $10,000 in terms of US dollars of the weight and fineness in effect on 31 January 1966. Pending ADB's selection of the appropriate successor to the 1966 dollar, the par value of each share is SDR 10,000 for financial reporting purposes. Exchange rate at 31 December 2012 was $1.53692. (Notes B and K)

The accompanying notes are an integral part of these financial statements (OCR-9).

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ASIAN DEVELOPMENT BANK—ORDINARY CAPITAL RESOURCES NOTES TO FINANCIAL STATEMENTS 31 December 2012 and 2011

NOTE A—NATURE OF OPERATIONS AND LIMITATIONS ON LOANS, GUARANTEES AND EQUITY INVESTMENTS

Nature of Operations

The Asian Development Bank (ADB), a multilateral development financial institution, was established in 1966 with its headquarters in Manila, Philippines. ADB and its operations are governed by the Agreement Establishing the Asian Development Bank (the Charter). Its purpose is to foster economic development and co-operation in Asia and the Pacific region and to contribute to the acceleration of the process of economic development of the developing member countries (DMCs) in the region, collectively and individually. Since 1999, ADB’s corporate vision and mission has been to help DMCs reduce poverty in the region. This was reaffirmed under the long-term strategic framework for 2008-2020 (Strategy 2020). Under Strategy 2020, ADB’s corporate vision continues to be “An Asia and Pacific Free of Poverty” and its mission has been to help its DMCs reduce poverty and improve living conditions and quality of life. ADB has been pursuing its mission and vision by focusing on three complementary strategic agendas: inclusive growth, environmentally sustainable growth, and regional integration.

ADB conducts its operations through the ordinary capital resources (OCR) and Special Funds (See Note Q). Mobilizing financial resources, including cofinancing, is another integral part of ADB’s operational activities, where ADB, alone or jointly, administers on behalf of donors funds provided for specific uses.

ADB’s OCR operations comprise loans, equity investments, and guarantees. ADB finances its ordinary operations through borrowings, paid-in capital, and reserves.

ADB is immune from taxation pursuant to Chapter VIII, Article 56, Exemption from Taxation , of the Charter.

Limitations on Loans, Guarantees, and Equity Investments

Article 12, paragraph 1 of the Charter provides that the total amount outstanding of loans, equity investments, and guarantees made by ADB shall not exceed the total of ADB’s unimpaired subscribed capital, reserves, and surplus, exclusive of the special reserve. ADB’s policy on lending limitations limits the total amount of disbursed loans, approved equity investments, and the maximum amount that could be demanded from ADB under its guarantee portfolio, to the total amount of ADB’s unimpaired subscribed capital, reserves and surplus. At 31 December 2012 and 2011, the total of such loans, equity investments, and guarantees aggregated approximately 31.0% and 29.2%, respectively, of the total subscribed capital, reserves, and surplus.

Article 12, paragraph 3 of the Charter provides that equity investments shall not exceed 10% of the unimpaired paid-in capital together with reserves and surplus, exclusive of the special reserve. At 31 December 2012, such equity investments represented approximately 8.4% (7.9% – 2011) of the paid-in capital, reserves, and surplus, as defined.

NOTE B—SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Presentation of the Financial Statements

The financial statements of the OCR are prepared in accordance with accounting principles generally accepted in the United States of America (US GAAP).

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Functional Currencies and Reporting Currency

The currencies of members are all functional currencies of ADB as these are the currencies of the primary economic environment in which OCR generates and expends cash. The reporting currency is the United States dollar (USD).

Translation of Currencies

ADB adopts the use of daily exchange rates for accounting and financial reporting purposes. This allows transactions in currencies other than USD to be translated to the reporting currency using exchange rates applicable at the time of transactions. At the end of each accounting month, translations of assets, liabilities, capital, and reserves denominated in non-USD are adjusted using the applicable rates of exchange at the end of the reporting period. These translation adjustments, other than those relating to the non-functional currencies (Note M) and to the maintenance of special drawing right (SDR) capital values (Notes K and L), are charged or credited to Accumulated translation adjustments and reported in CAPITAL AND RESERVES as part of Accumulated other comprehensive income.

Valuation of Capital Stock

The authorized capital stock of ADB is defined in Article 4, paragraph 1 of the Charter “in terms of United States dollars of the weight and fineness in effect on 31 January 1966” (the 1966 dollar) and the value of each share is defined as 10,000 1966 dollars. The capital stock had historically been translated into the current United States dollar (ADB’s unit of account) on the basis of its par value in terms of gold. From 1973 until 31 March 1978, the rate arrived at on this basis was $1.20635 per 1966 dollar. Since 1 April 1978, at which time the Second Amendment to the Articles of Agreement of the International Monetary Fund (IMF) came into effect, currencies no longer have par values in terms of gold. Pending ADB’s selection of the appropriate successor to the 1966 dollar, the capital stock has been valued for purposes of these financial statements in terms of the SDR at the value in current United States dollars as determined by the IMF, with each share valued at SDR10,000.

As of 31 December 2012, the value of the SDR in terms of the current United States dollar was $1.53692 ($1.53527 – 2011) giving a value for each share of ADB’s capital equivalent to $15,369.20 ($15,352.70 – 2011).

Derivative Financial Instruments

ADB reports all derivative transactions in accordance with Accounting Standards Codification (ASC) 815, “Derivatives and Hedging.” ASC 815 requires that derivative instruments be recorded in the Balance Sheet as either assets or liabilities measured at fair value.

In applying ASC 815, ADB has elected not to define any qualifying hedging relationships. Rather, all derivative instruments, as defined by ASC 815, have been marked to fair value, and all changes in fair value have been recognized in net income. ADB has elected not to define any qualifying hedging relationships, not because economic hedges do not exist, but rather because the application of ASC 815 hedging criteria does not make fully evident ADB’s risk management strategies.

Investments

All investment securities and negotiable certificates of deposit held by ADB are considered by management to be Available for Sale and are reported at fair value. Unrealized gains and losses are reported in CAPITAL AND RESERVES as part of Accumulated other comprehensive income. Realized gains and losses are included in revenue from investments and are measured by the difference between amortized cost and the net proceeds of sales. With respect to exchange traded futures, realized gains or losses are reported in the Statement of Income and Expenses under NET REALIZED GAINS (LOSSES) From investments.

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Interest income on investment securities and time deposits is recognized as earned and reported, net of amortization of premiums and discounts.

Unrealized losses on investment securities are assessed to determine whether the impairment is deemed to be other than temporary. If the impairment is deemed to be other than temporary, the investment is written down to the impaired value, which becomes the new cost basis of the investment. Impairment losses are not reversed for subsequent recoveries in the value of the investment, until it is sold.

Securities Transferred Under Repurchase Agreements and Securities Purchased Under Resale Arrangements

ADB accounts for transfers of financial assets in accordance with ASC 860, “Transfers and Servicing.” In general, transfers are accounted for as sales when control over the transferred assets has been relinquished. Otherwise the transfers are accounted for as repurchase/resale agreements and collateralized financing arrangements. Under repurchase agreements, securities transferred are recorded as assets and reported at estimated fair value and cash collateral received is recorded as liabilities and restricted cash. ADB monitors the fair value of the securities transferred under repurchase agreements and the collateral. Under resale arrangements, securities purchased are recorded as assets and are not re-pledged.

Loans

ADB’s loans are made to or guaranteed by members, with the exception of nonsovereign loans, and have loan terms ranging between 5 and 32 years. Loan interest income and loan commitment fees are recognized on accrual basis. In line with ADB’s principle of cost pass-through pricing, the funding cost margin is passed to LIBOR-based loan borrowers as a surcharge or rebate.

It is the policy of ADB to place loans in non-accrual status for which principal, interest, or other charges are overdue by six months. Interest and other charges on non-accruing loans are included in income only to the extent that payments have been received by ADB. Accordingly, loans are reinstated to accrual status when all the principal, interest and other charges due on the loan has been paid. ADB maintains a position of not taking part in debt rescheduling agreements with respect to sovereign loans. In the case of nonsovereign loans, ADB may agree to debt rescheduling only after alternative courses of action have been exhausted.

ADB’s periodic evaluation of the adequacy of the allowance for loan losses is based on its past loan loss experience, known and inherent risks in existing loans, and adverse situations that may affect a borrower’s ability to repay.

For sovereign loans, ADB determines that a loan is impaired and therefore subject to provisioning when principal or interest is in arrears for more than one year. Specific provision for sovereign loan losses is written-back when the borrower’s arrears have been fully settled and the borrower has re-established regular loan service payments. The nonsovereign loans are individually reviewed and subject to provisioning when the loan is considered impaired. The impairment is determined based on the difference between the loan carrying value and present value of expected future cash flows discounted at the loan’s effective interest rate. In addition, ADB provides collective provisions for nonsovereign loans based on the credit risk ratings and probability of default and assumed loss given default.

ADB establishes loan loss reserves for both sovereign and nonsovereign credit exposures to be used as a basis for capital adequacy against expected losses in loans and guarantees. The amount of expected loss pertaining to credit exposures that are not impaired or subject to collective provision is recorded as loss reserve in the equity section of the balance sheet. Any adjustment to loan loss reserve following this methodology is subject to the approval of the Board of Governors.

From 2000 to 2003, ADB levied front-end fees on all new sovereign loans. These fees are deferred and amortized over the life of the loans after offsetting deferred direct loan origination costs. Front-end fees were

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waived on sovereign loans approved from 2004 and were eliminated for sovereign loans negotiated on or after 1 October 2007. Since 1988, ADB has charged front-end fees for nonsovereign loans.

ADB levies a commitment charge on the undisbursed balance of effective loans. Unless otherwise provided by the loan agreement, the charges take effect commencing on the 60th day after the loan signing date and are credited to loan income.

Guarantees

ADB provides guarantees under its sovereign and nonsovereign operations. Guarantees are regarded as outstanding when the underlying financial obligation of the borrower is incurred. ADB would be required to perform under its guarantees if the payments guaranteed were not made by the debtor, and the guaranteed party called the guarantee by demanding payments from ADB in accordance with the term of the guarantee.

For guarantees issued and modified on or after 1 January 2003, ADB recognizes at the inception of a guarantee, a liability for the stand-by obligation to perform on guarantees. Front-end fee income on guarantees received is deferred and amortized over the term of the guarantee contract. ADB records a contingent liability for the probable losses related to guarantees outstanding. This provision, as well as the unamortized balance of the deferred guarantee fee income, and the unamortized balance of the obligation to stand ready, are included in Miscellaneous liabilities on the Balance Sheet.

Collateral

ADB requires collateral from individual swap counterparties in the form of approved liquid securities or cash to mitigate its credit exposure to these counterparties. It is the policy of ADB to restrict the collateral received from swap counterparties for fulfilling its obligations under the collateral agreement. ADB records the restricted cash in OTHER ASSETS with a corresponding obligation to return the cash in ACCOUNTS PAYABLE AND OTHER LIABILITIES. Collateral received in the form of liquid securities is disclosed in Note H and not recorded on OCR’s Balance Sheet.

Equity Investments

Investments in equity securities with readily determinable market price are considered “Available for Sale” and are reported at fair value, with unrealized gains and losses reported in CAPITAL AND RESERVES as part of Accumulated other comprehensive income.

ADB applies the equity method of accounting to investments where it has the ability to exercise influence such as in limited liability partnerships (LLPs) and certain limited liability companies (LLCs) that maintain a specific ownership account for each investor in accordance with ASC 323-30 “Partnerships, Joint Ventures, and Limited Liability Entities” and direct equity investment that fall under purview of ASC 323 “Investments— Equity Method and Joint Ventures.”

Investments in equity securities without readily determinable fair values are reported at cost or at written down value. These investments are assessed each quarter to reflect the amount that can be realized using valuation techniques appropriate to the market and industry of each investment. When impairment is identified and is deemed to be other than temporary, the equity investment is written down to the impaired value, which becomes the new cost basis of the equity investments. Impairment losses are not reversed for subsequent recoveries in the value of the equity investments. ADB has determined that it is not practicable to estimate the fair value of equity investments reported at cost or written down.

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Variable Interest Entities

ADB complies with ASC 810, “Consolidated Financial Statements.” ASC 810 requires an entity to consolidate and provide disclosures for any Variable Interest Entity (VIE) for which it is the primary beneficiary. On 1 January 2010, ASC 810 was amended to define the primary beneficiary to the entity that both has the (i) power to direct the activities that most significantly impact the economic performance of the VIE and the (ii) obligation to absorb losses or the right to receive benefits that could potentially be significant to the VIE. Prior to this amendment, the standard required the entity that would absorb the majority of VIE’s expected losses or receive a majority of expected residual return to be deemed as the primary beneficiary of the VIE. Variable interests can arise from equity investments, loans, and guarantees. ADB is required to disclose information about its involvement in VIE where ADB holds variable interest (see Note R).

Property, Furniture, and Equipment

Property, furniture, and equipment are stated at cost and, except for land, depreciated over estimated useful lives on a straight-line basis. Maintenance, repairs, and minor betterments are charged to expense. Land is stated at cost and is not amortized.

Borrowings

Borrowings are used as one source to provide funds for ADB’s operations. ADB diversifies its funding sources across markets, instruments, and maturities. ADB simultaneously enters into currency and/or interest rate swaps for asset/liability management.

ADB reports all borrowings that have associated derivative instruments at fair value (FV). Changes in FV are reported in net income. Legacy borrowings that do not have associated swaps continue to be reported at amortized cost. Amortization of discounts and premiums and issuance costs associated with new borrowings are deferred and amortized over the period during which the borrowing is outstanding.

Fair Value of Financial Instruments

ASC 820 defines fair value as the price that would be received to sell an asset or paid to transfer a liability at measurement date in an orderly transaction among willing participants with an assumption that the transaction takes place in the entity’s principal market, or in the absence of principal market, in the most advantageous market for the asset or liability. The most advantageous market is the market where the sale of the asset or transfer of liability would maximize the amount received for the asset or minimize the amount paid to transfer the liability. The fair value measurement is not adjusted for transaction cost.

Fair Value Hierarchy

ASC 820 establishes a fair value hierarchy that gives the highest priority to quoted prices in active markets for identical assets or liabilities (Level 1), next priority to observable market inputs or market corroborated data (Level 2), and the lowest priority to unobservable inputs without market corroborated data (Level 3).

The fair values of ADB’s financial assets and liabilities are categorized as follows:

Level 1: fair values are based on unadjusted quoted prices for identical assets or liabilities in active markets. Level 2: fair values are based on quoted prices for similar assets or liabilities in active markets or markets that are not active; or valuation models for which significant inputs are obtained from market-based data that are observable.

Level 3: fair values are based on prices or valuation models for which significant inputs to the model are unobservable.

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Inter-level transfers from one year to another may occur due to changes in market activities affecting the availability of quoted market prices or observable market data.

ADB’s policy is to recognize transfers in and transfers out of levels as of the end of the reporting period in which they occur.

Accounting Estimates

The preparation of the financial statements in conformity with US GAAP requires management to make reasonable estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent liabilities at the end of the year and the reported amounts of revenues and expenses during the year. The actual results could differ from those estimates. Judgments have been used in the valuation of certain financial instruments, the determination of the adequacy of the accumulated provisions for losses on loans and other exposures (irrevocable commitments and guarantees), the determination of net periodic cost from pension and other postretirement benefits plans, and the present value of benefit obligations.

Accounting and Reporting Developments

In April 2011, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2011-03, “Transfers and Servicing (Topic 860) – Reconsideration of Effective Control for Repurchase Agreements.” The update removes from the assessment of effective control the criterion requiring the transferor to have the ability to repurchase or redeem the financial assets on substantially the agreed terms, even in the event of default by the transferee. It does not change the other criteria used in the assessment of effective control. The revised guidance is effective from quarter ended 31 March 2012 for ADB. This update did not have an impact on OCR’s financial statements.

In May 2011, the FASB issued ASU 2011-04, “Fair Value Measurement (Topic 820) – Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in US GAAP and IFRSs”, which provides consistency between US GAAP and International Financial Reporting Standards (IFRSs) on the definition of fair value (FV) and guidance on how to measure FV and related disclosure requirements. The ASU does not require additional FV measurements and is not intended to establish valuation standards or affect valuation practices outside of financial reporting. The new guidance is effective from quarter ended 31 March 2012 for ADB. See Notes D, E, F, G, H, J, O, and P for the required disclosures.

In June 2011, the FASB issued ASU 2011-05, “Comprehensive Income (Topic 220) – Presentation of Comprehensive Income”, which requires entities to present details of items that are reclassified from other comprehensive income to net income in the statement of comprehensive income. Subsequently, FASB issued ASU 2011-12 in December 2011 to effectively defer only those changes in ASU 2011-05 that relate to the presentation of reclassification adjustments out of accumulated other comprehensive income. ADB elected to adopt the provisions in ASU 2011-05 and presented in OCR-2 and OCR-3 on OCR’s 31 December 2012 and 2011 financial statements the reclassification adjustments.

In December 2011, the FASB issued ASU 2011-11, “Balance Sheet (Topic 210) – Disclosures about Offsetting Assets and Liabilities”, to provide enhanced disclosures that will enable users of its financial statements to evaluate the effect or potential effect of netting arrangements on an entity’s financial position. An entity is required to apply the amendments for annual reporting periods beginning on or after 1 January 2013, and interim periods within those annual periods. ADB is currently assessing the impact of this update on OCR’s financial statements.

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Statement of Cash Flows

For the purposes of the Statement of Cash Flows, ADB considers that its cash and cash equivalents are limited to DUE FROM BANKS, which consist of cash on hand and current accounts in banks used for (i) operational disbursements, (ii) receipt of funds from encashment of member countries’ promissory notes, and (iii) clearing accounts.

NOTE C—RESTRICTIONS ON USE OF CURRENCIES OF MEMBERS

In accordance with Article 24, paragraph 2(i) of the Charter, the use by ADB or by any recipient from ADB of certain currencies may be restricted by members to payments for goods or services produced and intended for use in their territories. With respect to the currencies of 42 DMCs for 2012 (42 – 2011), cash in banks (due from banks) totaling $72,138,000 ($95,206,000 – 2011) may be, but are not currently so restricted.

In accordance with Article 24, paragraphs 2(i) and (ii) of the Charter, no member (one – 2011) has restricted the use by ADB or by any recipient from ADB of its currency to payments for goods or services produced in its territory. The member lifted the restriction under the agreement effective 4 December 2012.

NOTE D—INVESTMENTS

The main investment management objective is to maintain security and liquidity. Subject to these parameters, ADB seeks the highest possible return on its investments. Investments are governed by the Investment Authority approved by the Board of Directors in 2006.

ADB may purchase and sell exchange traded financial futures and option contracts, and enter into currency and interest rate swaps, and forward rate agreements. Exposure to interest rate risk may be adjusted within defined bands to reflect changing market conditions. These adjustments are made through the purchase and sale of securities, and financial futures. Accordingly, financial futures are held for risk management purposes. As of 31 December 2012, there are no outstanding purchase and sales of futures contracts (nil – 2011).

Included in Other securities as of 31 December 2012 were corporate obligations and other debt securities amounting to $770,508,000 ($1,200,001,000 – 2011).

ADB may engage in securities lending of government or government-guaranteed obligations and corporate obligations, for which ADB receives a guarantee from the securities custodian and a fee. Transfers of securities by ADB to counterparties are not accounted for as sales as the accounting criteria for the treatment of a sale have not been met. These securities must be available to meet ADB’s obligation to counterparties. Included in Investments as of 31 December 2012 and 2011 were securities transferred under securities lending arrangements as follows:

Government or government- guaranteed obligations Corporate obligations Total	2012 2011 91,735,000 $ 47,564,000 $ – 3,948,000 91,735,000 $ 51,512,000 $

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The currency composition of the investment portfolio as of 31 December 2012 and 2011 expressed in United States dollars was as follows:

Currency United States dollar Yen Australian dollar Euro Canadian dollar New Zealand dollar Swiss franc Others Total	2012 2011 11,242,498,000 $ 11,395,644,000 $ 7,935,445,000 6,511,793,000 803,184,000 739,003,000 784,898,000 1,043,317,000 420,775,000 406,312,000 348,335,000 319,638,000 345,884,000 367,857,000 1,896,996,000 724,705,000 23,778,015,000 $ 21,508,269,000 $

The estimated fair value and amortized cost of the investments by contractual maturity at 31 December 2012 and 2011 were as follows:

Due in one year or less Due after one year through five years Due after five years through ten years Due after ten years through fifteen years Total	Estimated Amortized Fair Value Cost 10,044,369,000 $ 10,026,461,000 $ 12,269,206,000 11,963,908,000 1,351,761,000 1,319,607,000 112,679,000 93,535,000 23,778,015,000 $ 23,403,511,000 $ 2012	2011
	Estimated Fair Value 10,044,369,000 $ 12,269,206,000 1,351,761,000 112,679,000 23,778,015,000 $	Estimated Amortized Fair Value Cost 8,093,610,000 $ 8,081,907,000 $ 11,895,876,000 11,605,916,000 1,415,163,000 1,345,745,000 103,620,000 100,729,000 21,508,269,000 $ 21,134,297,000 $

Additional information relating to investments in government or government-guaranteed obligations and other securities classified as available for sale are as follows:

		2012		2011
As of 31 December
Amortized cost	$	22,092,505,000	$	19,982,334,000
Estimated fair value		22,467,009,000		20,356,306,000
Gross unrealized gains		381,981,000		410,314,000
Gross unrealized losses		(7,477,000)		(36,342,000)
For the years ended 31 December:
Change in net unrealized gains
from prior year		532,000		50,223,000
Proceeds from sales		774,263,000		4,943,974,000
Gross gain on sales		26,533,000		99,070,000
Gross loss on sales		(221,000)		(7,746,000)

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The table below provides a listing of investments that sustained unrealized losses as of 31 December 2012. Six government or government-guaranteed obligations (five – 2011), one debt security (one – 2011) and no corporate obligations (two – 2011) sustained unrealized losses for over one year, representing 2.59% (2.71% – 2011) of the total investments. Comparative details for 2012 and 2011 are as follows:

For the year 2012 Government or government- guaranteed obligations Corporate bonds Others Total	Oneyear or less	Oneyear or less	Over o	neyear	Total
	Fair Value	Unrealized Losses	Fair Value	Unrealized Losses	Fair Unrealized Value Losses 6,691,205,000 $ 6,985,000 $ 49,999,000 152,000 5,019,000 340,000 6,746,223,000 $ 7,477,000 $
	6,081,318,000 $ 49,999,000 –	1,697,000 $ 152,000 –	609,887,000 $ – 5,019,000	5,288,000 $ – 340,000
	6,131,317,000 $	1,849,000 $	614,906,000 $	5,628,000 $
For the year 2011 Government or government- guaranteed obligations Corporate bonds Others Total	Oneyear or less		Over o	neyear	Total
	Fair Value	Unrealized Losses	Fair Value	Unrealized Losses	Fair Unrealized Value Losses 6,915,642,000 $ 30,097,000 $ 540,411,000 4,616,000 5,730,000 1,629,000 7,461,783,000 $ 36,342,000 $
	6,636,536,000 $ 242,784,000 –	25,247,000 $ 2,243,000 –	279,106,000 $ 297,627,000 5,730,000	4,850,000 $ 2,373,000 1,629,000
	6,879,320,000 $	27,490,000 $	582,463,000 $	8,852,000 $

Fair Value Disclosure

The fair value of investments as of 31 December 2012 and 2011 was as follows:

Assets Investments Government or government-guaranteed obligations Time deposits and other obligations of banks	31 December 2012 21,696,501,000 $ 1,311,006,000	Fair Value Measurements	Fair Value Measurements	Fair Value Measurements
		Level 1 18,895,969,000 $ –	Level 2 2,699,791,000 $ 1,311,006,000	Level 3
				100,741,000 $ –
Corporate obligations	765,152,000	610,938,000 5,019,000 347,453,000 –	150,093,000 – – 333,884,000	4,121,000 337,000 – –
Others	5,356,000
Securities transferred under repurchase agreement Securities purchased under resale arrangement	347,453,000 333,884,000
Total assets at fair value	24,459,352,000 $	19,859,379,000 $	4,494,774,000 $	105,199,000 $

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Assets Investments Government or government-guaranteed obligations Time deposits and other obligations of banks Corporate obligations	31 December 2011 19,156,304,000 $ 1,151,963,000 1,186,472,000	Fair Value Measurements	Fair Value Measurements
		Level 1 15,454,300,000 $ – 670,280,000	Level 2 Level 3 3,499,267,000 $ 202,737,000 $ 1,151,963,000 – 511,588,000 4,604,000
Others	13,530,000	5,730,000	7,194,000 606,000
Securities transferred under repurchase agreement Securities purchased under resale arrangement Total assets at fair value	330,044,000 395,498,000 22,233,811,000 $	330,044,000 – 16,460,354,000 $	– – 395,498,000 – 5,565,510,000 $ 207,947,000 $

If available, active market quotes are used to assign fair values to investment securities. These include most government/government-backed obligations, corporate obligations, and other debt securities. For investments where active market quotes are not available, investments are categorized as Level 2 or Level 3, and valuation is provided by independent valuation services, custodians, and asset managers, or based on discounted cash flow model using market observable inputs, such as interest rates, foreign exchange rates, basis spreads, cross currency rates, and volatilities, and unobservable inputs, such as option adjusted spreads. Time deposits are reported at cost, which approximates fair value.

OCR’s investments in liquid assets are governed by the Investment Authority approved by the Board of Directors. The asset and liability management committee and risk committee are involved in overseeing the activities and performance of the investment portfolio. ADB maintains documented processes and internal controls to value the investment securities. The data management unit in the treasury department is responsible for providing the valuation in accordance with the business process. In instances where ADB relies primarily on prices from third party pricing information, there are procedures in place to validate the appropriateness of those values in determining the hierarchy levels. This involves evaluating the nature of prices provided by third party pricing sources to determine if they are indicative or binding prices.

Investments categorized as Level 3 include securities with fair values derived using a discounted cash flow model with significant unobservable inputs, or provided by independent pricing providers. The significant unobservable inputs include option adjusted spread, which is derived from a similar security issued by the same issuer. The option adjusted spread is used to adjust the discount rates, and significant increase (decrease) in the spread will generally decrease (increase) the fair value of the security. The following table provides quantitative information about the significant unobservable input used.

Investments Government or government- guaranteed obligations and other debt securities	Valuation Technique Discounted cash flows	Unobservable Range Inputs (Weighted Average) Option adjusted spread 0.07% to 0.09% (0.08%)

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The table below provides the details of transfers between Levels 1 and 2 for the years ended 31 December 2012 and 2011:

Investments	Level 1 Level 2 2012	Level 1 Level 2 2012	2011	2011
	Level 1		Level 1	Level 2
Government or government-guaranteed obligations
Transfers into (out of) Transfers (out of) into Corporate obligations Transfers into (out of) Transfers (out of) into	101,374,000 $ (26,777,000) 20,272,000 (14,509,000)	(101,374,000) $ 26,777,000 (20,272,000) 14,509,000	9,997,000 $ (462,234,000) 29,209,000 (116,520,000)	(9,997,000) $ 462,234,000 (29,209,000) 116,520,000
	80,360,000 $	(80,360,000) $	(539,548,000) $	539,548,000 $

The inter-level transfers are attributed to the availability of market quotes.

The following tables present the changes in the carrying amounts of ADB’s Level 3 investments for the years ended 31 December 2012 and 2011:

Balance, 1 January 2012		Investments	Investments
	Government or gov't.-guaranteed obligations 202,737,000 $	Corporate obligations 4,604,000 $	Asset- backed/mortgage- backed securities – $	Others
				606,000 $
Total gains (losses) - (realized/unrealized) Included in earningsa Included in other comprehensive income (OCR-3)	–	112,000	–	–
Currency translation adjustments Unrealized investment holding losses	11,000 (227,000)	– 109,000	– –	– –
Purchases Sales/Maturities Settlement and others Transfers into Level 3	(7,607,000) – –	3,983,000 (4,687,000) – –	– – – –	– (269,000) – –
Transfers out of Level 3 Balance, 31 December 2012	(94,173,000) 100,741,000 $	– 4,121,000 $	– – $	–
				337,000 $
The amount of total gains (losses) for the period recognized in other comprehensive income attributable to the change in net unrealized gains or lossesbrelating to assets/liabilities still held at the reporting date	(208,000) $	136,000 $	– $	– $
aIncluded in income from Investments (OCR-2). bIncluded in unrealized investment holding gains for the period	(OCR-3).

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		Investments	Investments
	Government or gov't.-guaranteed obligations	Corporate obligations	Asset- backed/mortgage- backed securities	Others
Balance, 1 January 2011 Total gains (losses) - (realized/unrealized) Included in earningsa Included in other comprehensive income (OCR-3)	3,559,917,000 $ 216,000	318,969,000 $ (18,000)	2,494,000 $ –	849,000 $ –
Currency translation adjustments Unrealized investment holding losses	1,035,000 (6,050,000)	– 120,000	– –	– –
Purchases Sales/Maturities Settlement and others Transfers into Level 3	93,999,000 (1,326,221,000) – 107,404,000	– – – 4,502,000	– (2,356,000) (138,000) –	– – (243,000) –
Transfers out of Level 3 Balance, 31 December 2011	(2,227,563,000) 202,737,000 $	(318,969,000) 4,604,000 $	– – $	–
				606,000 $
The amount of total gains (losses) for the period recognized in other comprehensive income attributable to the change in net unrealized gains or lossesbrelating to assets/liabilities still held at the reporting date	120,000 $	120,000 $	– $	– $

a Included in income from Investments (OCR-2). b Included in unrealized investment holding gains for the period (OCR-3).

Transfers into and out of Level 3 in 2012 are attributed to the availability of observable inputs and in 2011 are primarily the result of refining ADB’s valuation approach. Investment securities classified under Level 3 consist of government or government-guaranteed obligations with a credit quality rating equivalent to Standard and Poor’s AAA and corporate obligations with a credit quality rating equivalent to Standard and Poor’s AA.

NOTE E—LOANS

Loans

The carrying amount and estimated fair value of loans outstanding at 31 December 2012 and 2011 were as follows:

Fixed rate multicurrency loans Pool-based single currency (¥) loans Pool-based single currency (US$) loans LIBOR-based loans Local currency loans Loan arising from guarantee call Total	2012	2012	2011
	Carrying Value	Estimated Fair Value	Carrying Estimated Value Fair Value 11,488,000 $ 12,674,000 $ 1,970,499,000 2,185,311,000 5,137,483,000 6,200,680,000 41,772,348,000 42,091,798,000 867,394,000 888,174,000 48,000 48,000 49,759,260,000 $ 51,378,685,000 $
	5,685,000 $ 1,300,506,000 4,394,163,000 46,303,562,000 833,229,000 –	6,108,000 $ 1,305,183,000 5,271,642,000 46,639,429,000 859,854,000 –
	52,837,145,000 $	54,082,216,000 $

Prior to 1 July 1986, the lending rate of ADB was based on a multicurrency fixed lending rate system under which loans carried interest rates fixed at the time of loan approval for the entire life of the loans. Effective 1 July 1986, ADB adopted a multicurrency pool-based variable lending rate system. In July 1992, ADB introduced a United States dollar pool-based variable lending rate system, and in November 1994, a market-based lending rate system was made available to sovereign and nonsovereign borrowers. The

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outstanding balances of pool-based multicurrency loans were subsequently transformed into pool-based single currency loans in yen, effective 1 January 2004.

Commencing 1 July 2001, ADB introduced LIBOR-based loans (LBLs) in the following currencies – United States dollar, euro, and yen. The LBL lending facility offers borrowers (i) choice of currency and interest rate basis; (ii) flexibility to change the original loan terms (currency and interest rate basis) at any time during the life of the loan; and (iii) options to cap or collar the floating lending rate at any time during the life of the loan. With the introduction of LBLs, prior loan windows are no longer offered to borrowers. ADB enhanced the LBL lending facility to sovereign LBLs negotiated after 1 January 2007, offering additional major currencies that ADB can efficiently intermediate, and additional repayment options including (i) annuity method with various discount factors, (ii) straight-line repayment, (iii) bullet repayment, and (iv) custom-tailored repayment.

In November 2002, ADB started to offer local currency loan (LCL) to nonsovereign borrowers and extended the LCL to sovereign borrowers in 2005.

In June 2009, ADB established a Countercyclical Support Facility (CSF) in response to the global economic crisis that spread to Asia and the Pacific. Loans approved under the CSF carry a lending spread of 2.0% above ADB’s average funding cost, and have a maturity of 5 years, including a 3-year grace period. As of 31 December 2012, five sovereign loans totaling $2,375,000,000 were outstanding.

During 2012, ADB received prepayments for ten loans (seven loans – 2011) amounting to $61,278,000 ($104,677,000 – 2011) and collected prepayment premiums of $15,000 ($334,000 – 2011). 92% of the prepaid amounts in 2012 were LIBOR-based loans compared to 57% in 2011.

Waiver on Loan Charges

For eligible sovereign loans negotiated before 1 October 2007, ADB continued to provide a waiver of a portion of interest on loans and commitment charges on undisbursed balances. The reduction in net income from the waivers on loan charges for the years ended 31 December 2012 and 2011 is summarized below:

Interest w aiver Commitment charge w aiver Total	2012	2011
	63,942,000 $ 1,430,000	65,852,000 $ 2,229,000 68,081,000 $
	65,372,000 $

Loans in Non-accrual Status

ADB places loans in non-accrual status when they are past due by six months.

One nonsovereign loan was in non-accrual status as of 31 December 2012 (one – 2011) with principal outstanding and overdue of $18,405,000 ($22,826,000 – 2011). There was a recovery of unrecognized income amounting to $58,000 from nonsovereign loans for the year ended 31 December 2012 ($1,000 – 2011).

There were no sovereign loans in non-accrual status in 2012 or 2011.

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An analysis of the age of the recorded loans outstanding including receivable arising from guarantee call, that are past due as of 31 December 2012 and 2011 is as follows:

2012 Sovereign Loans Nonsovereign Loans Total Allowance for loan losses Unamortized direct loan origination fees—net Loans Outstanding 2011 Sovereign Loans Nonsovereign Loans Total Allowance for loan losses Unamortized direct loan origination fees—net Loans Outstanding	Overdue Loan Service Payments	Overdue Loan Service Payments	Overdue Loan Service Payments	Current	Total Loans
	**1–90 Days **	> 90 Days	Total
	– $ –	– $ 18,569,000	– $ 18,569,000	49,845,608,000 $ 2,949,457,000	49,845,608,000 $ 2,968,026,000
	– $	18,569,000 $	18,569,000 $	52,795,065,000 $	52,813,634,000 (42,533,000) 66,044,000
	– $ –	– $ 23,003,000	– $ 23,003,000	46,972,115,000 $ 2,734,272,000
					52,837,145,000 $
					46,972,115,000 $ 2,757,275,000
	– $	23,003,000 $	23,003,000 $	49,706,387,000 $	49,729,390,000 (35,030,000) 64,900,000
					49,759,260,000 $

As of 31 December 2012 and 2011, there were no loans 90 days or greater past due still accruing interest.

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Undisbursed loan commitments and an analysis of loans by borrowers as of 31 December 2012 are shown in OCR-6. The carrying amounts of loan outstanding by loan products at 31 December 2012 and 2011 are as follows:

Sovereign Loans Fixed rate multicurrency loans Pool-based single currency (¥) loans Pool-based single currency (US$) loans LIBOR-based loans Local currency loans Allow ance for loan losses Unamortized direct loan origination cost—net Subtotal Nonsovereign Loans LIBOR-based loans Local currency loans Others Allow ance for loan losses Unamortized front-end fee—net Subtotal Total

2012 2011 5,685,000 $ 11,488,000 $ 1,300,506,000 1,970,499,000 4,394,288,000 5,137,821,000 43,997,532,000 39,702,802,000 147,597,000 149,505,000 49,845,608,000 46,972,115,000 – – 91,533,000 80,534,000 91,533,000 80,534,000 49,937,141,000 47,052,649,000 2,270,328,000 2,024,470,000 697,534,000 732,628,000 164,000 177,000 2,968,026,000 2,757,275,000 (42,533,000) (35,030,000) (25,489,000) (15,634,000) (68,022,000) (50,664,000) 2,900,004,000 2,706,611,000 52,837,145,000 $ 49,759,260,000 $

Allowance for Loan Losses

ADB has not suffered any losses of principal on sovereign loans to date. During the year, no loan loss provision has been made against outstanding sovereign loans (nil – 2011). There was no accumulated loan loss provision for sovereign loans as of 31 December 2012 (nil – 2011).

A total of $7,503,000 in loss provision was made for nonsovereign loans ($7,475,000 – 2011 net write back) consisting of $11,758,000 provision ($5,657,000 – 2011), $4,869,000 write back ($13,052,000 write back/off – 2011), and $614,000 translation adjustment (negative $80,000 – 2011).

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The changes in the allowance for loan losses during 2012 and 2011 as well as information pertaining to loans which were subject to specific allowance for loan losses were as follows:

Allowance for Credit Losses: Beginning balance Provision during the year Written back/off Translation adjustment Ending Balance Ending balance individually evaluated for impairment Ending balance collectively evaluated for impairment Loans: Ending Balance Ending balance individually evaluated for impairment Ending balance collectively evaluated for impairment		2012			2011
	Sovereign Loans	Nonsovereign Loans	Total	Sovereign Loans	Nonsovereign Loans Total 42,505,000 $ 42,505,000 $ 5,657,000 5,657,000 (13,052,000) (13,052,000) (80,000) (80,000) 35,030,000 $ 35,030,000 $ 9,609,000 $ 9,609,000 $ 25,421,000 $ 25,421,000 $ 2,757,275,000 $ 49,729,390,000 $ 24,103,000 $ 24,103,000 $ 2,733,172,000 $ 2,733,172,000 $
	– $ – – –	35,030,000 $ 11,758,000 (4,869,000) 614,000	35,030,000 $ 11,758,000 (4,869,000) 614,000	– $ – – –
	– $	42,533,000 $	42,533,000 $	– $
	– $ – $ 49,845,608,000 $	12,964,000 $ 29,569,000 $ 2,968,026,000 $	12,964,000 $ 29,569,000 $ 52,813,634,000 $	– $ – $ 46,972,115,000 $
	– $ – $	48,550,000 $ 2,919,476,000 $	48,550,000 $ 2,919,476,000 $	– $ – $

Allowances are established for all impaired loans. The recorded impaired loans receivable with related allowance for loan losses during 2012 and 2011 were as follows:

Sovereign Loans Nonsovereign Loans		2012		Recorded Loan Receivable – $ 24,103,000	2011
	Recorded Loan Receivable	Unpaid Principal balance	Related allowance – $ 12,964,000		Unpaid Principal balance Related allowance – $ – $ 23,003,000 9,609,000
	– $ 48,550,000	– $ 18,569,000

No loans were modified or restructured for the years ended 31 December 2012 and 2011.

Credit Risks and Quality of Loans

ADB is exposed to credit risks in the loan portfolio if a borrower defaults or its creditworthiness deteriorates. Credit risk represents the potential loss due to possible nonperformance by obligors and counterparties under the terms of the contract. ADB manages country risk for lending operations through continuous monitoring of creditworthiness of the borrowers and capital adequacy framework.

ADB monitors credit quality of the loans by assigning a risk rating to each loan on an internal scale from 1 to 14 with 1 denoting the lowest expectation of credit risk and 14 denoting that the borrower has defaulted. The rating scale corresponds to the rating scales used by international rating agencies. For sovereign loans, ADB generally uses the average sovereign ratings assigned by external rating agencies which are mapped to ADB’s internal scale. For nonsovereign loans, each transaction is reviewed and assigned a rating based on a methodology that is broadly aligned with the rating approach of international rating agencies. The risk ratings are used to monitor the credit risk in the portfolio.

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The following table summarizes the credit quality of sovereign and nonsovereign loans. High credit risk includes $18,569,000 in nonsovereign loans that were considered impaired ($24,103,000 nonsovereign loans – 2011).

Risk Class Low credit risk Medium credt risk High credit risk Total	Risk Rating 1–5 (AAA to BBB–) 6–11 (BB+ to B–) 12–14 (CCC+ to D)	2012 2011 Sovereign Loans	2012 2011 Sovereign Loans	Nonsovereign Loans	Nonsovereign Loans
		2012		2012	2011
		34,358,798,000 $ 10,465,274,000 5,021,536,000	23,006,067,000 $ 23,938,700,000 27,348,000	940,005,000 $ 1,699,518,000 328,503,000	773,600,000 $ 1,910,494,000 73,181,000
		49,845,608,000 $	46,972,115,000 $	2,968,026,000 $	2,757,275,000 $

As of 31 December 2012, ADB had a significant concentration of credit risk to Asia and the Pacific region associated with loan products. The credit exposure determined based on fair value of loans and including the outstanding guarantees amounted to $55,987,099,000 ($53,373,873,000 – 2011).

Fair Value Disclosure

ADB does not sell its sovereign loans, nor does it believe there is a market for its sovereign loans. As of 31 December 2012 and 2011, all loans are carried at amortized cost. The loan portfolio is fair valued using a discounted cash flow method, by which expected cash flows are discounted at applicable market yield curves, plus ADB's lending spread, reduced by the specific and collective provisions.

Fair valuation is based on internal discounted cash flow models. Inputs for the models are based on available market data such as yield curves, interest rates, volatilities, credit curves, and foreign exchange rates. Parameters and models used for valuation are subject to internal review and periodic external validation. The accounting division is responsible for determining and reporting the fair value of the loan portfolio. The office of risk management is primarily responsible for determining the specific and collective provisions for the nonsovereign loans and the accounting division, in coordination with regional departments, is responsible for determining the specific provisions for sovereign loans. The provisioning levels are discussed at the risk committee and reported to the Board of Directors quarterly.

The significant observable inputs used in valuing the various classes of loans classified as Level 2 include foreign exchange rates and yield curves specified to index fixed rates, deposit and swap interest rates, and yield curves specified to LIBOR. The significant unobservable inputs used in valuing the various classes of loans classified as Level 3 include probability of default, weighted average cost of fixed and floating rate borrowings attached to pool-based single currency loans and swaps spreads for selected currencies.

Significant increase (decrease) in these unobservable inputs, independently, will generally decrease (increase) the fair value of the loan.

The fair value hierarchy of all ADB loans as of 31 December 2012:

Level 1 Level 2 Level 3 Total loans at fair value	2012
	– $ 45,290,049,000 8,792,167,000
	54,082,216,000 $

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Cofinancing

ADB functions as lead lender in cofinancing arrangements with other participating financial institutions who also provide funds to ADB’s sovereign and nonsovereign borrowers. In such capacity, ADB provides loan administration services, which include loan disbursements and loan collections. The participating financial institutions have no recourse to ADB for their outstanding loan balances. These loans are not recorded as part of OCR’s Balance Sheet.

Loans administered by ADB on behalf of participating institutions during the year ending 31 December 2012 and 2011 were as follows:

Sovereign loans Nonsovereign loans Total	2012	No.of Loans 44 8 52	2011
	Amount 1,181,585,000 $ 281,143,000 1,462,728,000 $		No.of Amount Loans 1,192,845,000 $ 42 356,687,000 8 1,549,532,000 $ 50

During the year ended 31 December 2012, a total of $210,000 ($65,000 – 2011) was received as compensation for arranging and administering such loans. This amount has been included in Revenue from other sources.

NOTE F—GUARANTEES

ADB provides guarantees under its sovereign and nonsovereign operations. Such guarantees include (i) partial credit guarantees where certain principal and/or interest payments are covered; and (ii) political risk guarantees, which provide coverage against well-defined sovereign risks. While counterguarantees from the host government are required for all sovereign guarantees, guarantees for nonsovereign projects may be provided with or without a host government counterguarantee. ADB also seeks risk-sharing arrangements that set ADB’s net exposure under a guarantee at the lowest level required to mobilize the necessary financing while maintaining a participation that is meaningful to its financing partners. A counterguarantee takes the form of a counter-guarantors’ agreement to indemnify ADB for any payments it makes under the guarantee. In the event that a guarantee is called, ADB has the contractual right to require payment from the counter-guarantor, on demand, or as ADB may otherwise direct.

The maturity of the underlying instruments for which ADB provided the partial credit guarantees is generally 2 years for short term programs and 9 or more years for long term programs. ADB’s political risk guarantee is callable when a guaranteed event has occurred and such an event has resulted in debt service default to the guaranteed lender.

As of 31 December 2012, total loan arising from guarantee call was $164,000 ($177,000 – 2011) with corresponding allowance for losses of $164,000 ($129,000 – 2011). None of the outstanding amounts under the guarantee obligations as of 31 December 2012 and 2011 were subject for call.

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The committed and outstanding amounts of these guarantee obligations as of 31 December 2012 and 2011 covered:

Partial Credit Guarantees with counterguarantee without counterguarantee Political Risk Guarantees with counterguarantee without counterguarantee Total	Committed Outstanding Amount Amount 1,450,009,000 $ 1,419,400,000 $ 821,162,000 316,012,000 2,271,171,000 1,735,412,000 262,358,000 136,630,000 80,686,000 32,842,000 343,044,000 169,472,000 2,614,215,000 $ 1,904,884,000 $ 2012	2011
	Committed Amount 1,450,009,000 $ 821,162,000 2,271,171,000 262,358,000 80,686,000 343,044,000 2,614,215,000 $	Committed Outstanding Amount Amount 1,550,995,000 $ 1,533,445,000 $ 759,913,000 355,470,000 2,310,908,000 1,888,915,000 139,967,000 92,093,000 29,535,000 14,180,000 169,502,000 106,273,000 2,480,410,000 $ 1,995,188,000 $

The committed amount represents the maximum potential amount of undiscounted future payments that ADB could be required to make, inclusive of standby portion for which ADB is committed but not currently at risk. The outstanding amount represents the guaranteed amount utilized under the related loans, which have been disbursed as of the end of the year, exclusive of the standby portion.

As of 31 December 2012, a total liability of $21,725,000 ($13,857,000 – 2011) relating to stand-by ready obligation for three partial credit risk guarantees (two – 2011) and three political risk guarantees (two – 2011) has been included in ACCOUNTS PAYABLE AND OTHER LIABILITIES – Miscellaneous on the Balance Sheet for all guarantees issued after 31 December 2002.

Fair Value Disclosure

As of 31 December 2012 and 2011, all of ADB’s future guarantee receivables and guarantee liabilities are classified as Level 3 within the fair value hierarchy.

The accounting division is responsible for determining and reporting the fair value of guarantees reported in the balance sheet. Future guarantees receivable and guarantee liabilities are stated at discounted present value using significant unobservable input such as discount rates applicable to individual guarantee contracts that are internally determined and are classified in Level 3 category. An increase in discount rates generally results in a decrease in the fair value of the guarantees.

The valuation technique and quantitative information regarding significant unobservable inputs for guarantee receivable/guarantee liabilities classified as Level 3 as of 31 December 2012 are presented below:

Guarantee receivable/ Guarantee liabilities	Valuation Technique Discounted cash flows	Unobservable Range Inputs (Weighted Average) Discount rates 3.04% to 5.37% (3.7%)

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The following tables present the changes in the carrying amounts of ADB’s Level 3 future guarantee receivable/liability for the years ended 31 December 2012 and 2011:

	Guarantee Receivable/Liability	Guarantee Receivable/Liability
	2012	2011
Beginning of the period	(13,857,000) $ – – (20,536,000) 12,668,000 (21,725,000) $ – $	(17,604,000) $
Total gains (losses) - (realized/unrealized)
Included in earnings Included in other comprehensive income Issuances		– – (7,475,000)
Maturities/Redemptions		11,222,000
End of the period The amount of total gains (losses) for the period included in earnings attributable to the change in net unrealized gains or losses relating to assets/liabilities still held at the reporting date		(13,857,000) $
		– $

NOTE G—EQUITY INVESTMENTS

ADB’s equity investments may be in the form of direct equity investments (e.g. common, preferred, or other capital stock) or through investment funds (e.g. private equity funds). They are classified and accounted into: (i) investments classified as available for sale; (ii) investments accounted for under the equity method; and (iii) investments in other non-controlled entities without readily available fair values, reported at cost or written down value.

The carrying value of equity investments as of 31 December 2012 and 2011 was as follows:

Equity method Available for sale Cost method Total	2012 2011 483,675,000 $ 460,708,000 $ 271,213,000 297,741,000 194,373,000 212,173,000 949,261,000 $ 970,622,000 $

As of 31 December 2012, there were four (five – 2011) equity investments which were classified as available for sale totaling $271,213,000 ($297,741,000 – 2011). There was one investment that sustained unrealized losses in 2012 (one – 2011).

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Additional information relating to equity investments classified as available for sale is as follows:

As of 31 December Amortized cost Estimated fair value	2012 2011 56,988,000 $ 76,040,000 $ 271,213,000 297,741,000
Gross unrealized gains Gross unrealized losses	214,265,000 221,718,000 (40,000) (17,000)
For the years ended 31 December: Change in net unrealized gains from prior year Proceeds from sales Gross gain on sales Gross loss on sales	(7,476,000) (151,175,000) 132,081,000 150,136,000 88,062,000 110,838,000 – (320,000)

Approved equity investment facility that has not been disbursed was $651,991,000 at 31 December 2012 ($611,500,000 – 2011).

The fair value hierarchy of ADB’s equity investments reported at fair value as of 31 December 2012 was $271,213,000 ($297,741,000 – 2011). These comprise equity investments with readily determinable market prices, which are classified as available for sale and are valued using quoted prices in active markets and are classified as Level 1.

NOTE H—DERIVATIVE INSTRUMENTS

ADB uses derivative instruments for asset and liability management of individual positions and portfolios. The fair value of outstanding currency and interest rate swap agreements is determined at the estimated amount that ADB would receive or pay to terminate the agreements using market-based valuation models. The basis of valuation is the present value of expected cash flows based on market data.

Interest rate swaps: Under a typical interest rate swap agreement, one party agrees to make periodic payments based on a notional principal amount and an interest rate that is fixed at the outset of the agreement. The counterparty agrees to make floating rate payments based on the same notional principal amount. The terms of ADB’s interest rate swap agreements usually match the terms of particular borrowings.

Currency swaps: Under a typical currency swap agreement, one party agrees to make periodic payments in one currency while the counterparty agrees to make periodic payments in another currency. The payments may be fixed at the outset of the agreement or vary based on interest rates. A receivable is created for the currency swapped out, and a payable is created for the currency swapped in. The terms of ADB’s currency swap agreements usually match the terms of particular borrowings.

FX swaps: Under a typical foreign exchange swap, ADB agrees to make payment in one currency while the counterparty agrees to make payment in another currency, on the basis of agreed spot and forward rates. The terms of ADB’s FX swaps agreement usually match the terms of particular investments.

Exchange Traded Futures: Futures are contracts for delayed delivery of securities or money market instruments in which the seller agrees to make delivery at a specified future date of a specified instrument at a specified price or yield. Initial margin requirements are met with cash or securities, and changes in the market prices are generally settled daily in cash. ADB generally closes out open positions prior to maturity. Therefore, cash receipts or payments are limited to the change in market value of the future contracts. As of 31 December 2012, there was no payment on future contracts ($556,000 – 2011).

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Included in Receivable/Payable from Swaps-Others are interest rate and currency swaps that ADB has entered into for the purpose of hedging specific investments, loans, and borrowings. The loan related swaps were executed to better align the composition of certain outstanding loans with funding sources.

Fair Value Disclosure

The fair value hierarchy of ADB’s derivatives and the location as of 31 December 2012 and 2011 was as follows:

Assets	Balance Sheet Location	31 December 2012	F	air Value Measurement	s
			Level 1	Level 2	Level 3
Borrowings related swaps	Receivable from Swaps - Borrowings
Currency swaps		27,700,409,000 $	– $	21,064,844,000 $	6,635,565,000 $
Interest rate swaps FX Swaps Investments related swaps Currency swaps Interest rate swaps FX swaps Loans related swaps Currency swaps Interest rate swaps	Receivable from Swaps - Others Receivable from Swaps - Others	4,613,581,000 104,972,000 4,808,266,000 40,758,000 3,691,902,000 597,180,000 33,881,000	– – – – – – –	4,554,344,000 104,972,000 4,808,266,000 40,758,000 3,691,902,000 597,180,000 17,273,000	59,237,000 – – – – – 16,608,000
Total assets at fair value Liabilities		41,590,949,000 $	– $	34,879,539,000 $	6,711,410,000 $
Borrowings related swaps	Payable for Swaps - Borrowings
Currency swaps		24,972,147,000 $	– $	24,972,147,000 $	– $
Interest rate swaps FX Swaps Investments related swaps Currency swaps Interest rate swaps FX swaps Loans related swaps Currency swaps Interest rate swaps	Payable for Swaps - Others Payable for Swaps - Others	3,096,876,000 104,246,000 4,762,038,000 104,182,000 3,447,457,000 576,010,000 89,966,000	– – – – – – –	3,035,737,000 104,246,000 4,762,038,000 104,182,000 3,447,457,000 25,608,000 68,464,000	61,139,000 – – – – 550,402,000 21,502,000
Total liabilities at fair value		37,152,922,000 $	– $	36,519,879,000 $	633,043,000 $

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Assets	Balance Sheet Location	31 December 2011	F	air Value Measurement	s
			Level 1	Level 2	Level 3
Borrowings related swaps	Receivable from Swaps - Borrowings
Currency swaps		26,014,414,000 $	– $	20,147,436,000 $	5,866,978,000 $
Interest rate swaps FX Swaps Investments related swaps Futures Currency swaps Interest rate swaps Loans related swaps Currency swaps Interest rate swaps	Receivable from Swaps - Others Receivable from Swaps - Others	5,139,633,000 219,057,000 1,877,873,000 55,943,000 3,615,024,000 620,385,000 50,982,000	– – – – – – –	5,056,223,000 219,057,000 1,877,873,000 55,943,000 3,615,024,000 620,385,000 28,481,000	83,410,000 – – – – – 22,501,000
Total assets at fair value Liabilities		37,593,311,000 $	– $	31,620,422,000 $	5,972,889,000 $
Borrowings related swaps	Payable for Swaps - Borrowings
Currency swaps		23,742,774,000 $	– $	23,742,774,000 $	– $
Interest rate swaps FX Swaps Investments related swaps Futures Currency swaps Interest rate swaps Loans related swaps Currency swaps Interest rate swaps	Payable for Swaps - Others Payable for Swaps - Others	3,505,734,000 216,857,000 2,104,936,000 116,731,000 3,632,380,000 608,110,000 114,209,000	– – – – – – –	3,422,175,000 216,857,000 2,104,936,000 116,731,000 3,632,380,000 25,560,000 86,793,000	83,559,000 – – – – 582,550,000 27,416,000
Total liabilities at fair value		34,041,731,000 $	– $	33,348,206,000 $	693,525,000 $

The office of risk management is primarily responsible for determining the fair value of derivatives using discounted cash flow models. Inputs for the models are based on available market data such as interest rates, volatilities, credit curves, and foreign exchange rates. Parameters and models used for valuation are subject to internal review and periodic external validation.

Foreign exchange, interest rate, and cross currency swap contracts are fair valued with market inputs using discounted cash flow models. Market inputs, such as yield curves, foreign exchange rates, basis spreads, cross currency rates, and volatilities are applied to the models to determine fair value. The market inputs to the model are obtained from pricing services and brokers. ADB has a process to validate the appropriateness of the inputs in determining the hierarchy levels. This involves evaluating the nature of rates and spreads to determine if they are indicative and binding. For some interest rate and currency swaps, basis swaps spreads for selected currencies are considered to be significant unobservable inputs to derive the discount rates based on benchmark yield curves adjusted with a basis swap spread.

A significant increase (decrease) in the basis swap spread will generally decrease (increase) the fair value of derivative assets. A significant increase (decrease) in the basis swap spread will generally increase (decrease) the fair value of derivative liabilities.

During the year ended 31 December 2012, there were no inter-level transfers in the derivatives portfolio.

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The valuation techniques and quantitative information on significant unobservable inputs used in valuing ADB’s derivative instruments classified as Level 3 as of 31 December 2012 are presented below:

Currency swaps, interest rate swaps, FX Swaps	Valuation Technique Discounted cash flows	Unobservable Range Inputs (Weighted Average) Basis swap spread 2.13% to 6.25% (4.28%)

The following tables present the changes in the carrying amounts of ADB’s Level 3 financial assets and financial liabilities for the years ended 31 December 2012 and 2011:

	Swaps receivable Swaps payable Borrowings related swaps	Swaps receivable Swaps payable Borrowings related swaps	Swaps receivable Swaps payable Loans related swaps	Swaps receivable Swaps payable Loans related swaps
	Swaps receivable		Swaps receivable
Balance, 1 January 2012 Total gains (losses) - (realized/unrealized) Included in earningsa Included in other comprehensive incomeb Issuances Maturities/Redemptions	5,950,388,000 $ 99,474,000 179,112,000 2,245,148,000 (1,779,320,000)	(83,559,000) $ 22,370,000 50,000 – –	22,501,000 $ (5,219,000) (674,000) – –	(609,966,000) $ 20,796,000 (1,903,000) (3,658,000) c 22,827,000
Balance, 31 December 2012	6,694,802,000 $	(61,139,000) $	16,608,000 $	(571,904,000) $
The amount of total gains (losses) for the period included in earnings attributable to the change in net unrealized gains or lossesarelating to assets/liabilities still held at the reporting date	15,804,000 $	21,515,000 $	(4,955,000) $	21,051,000 $

a Included in net unrealized (losses) gains (OCR-2). b Included in currency translation adjustments (OCR-3). c Accretion.

Balance, 1 January 2011 Total gains (losses) - (realized/unrealized) Included in earningsa Included in other comprehensive incomeb Issuances Maturities/Redemptions Balance, 31 December 2011 The amount of total gains (losses) for the period included in earnings attributable to the change in net unrealized gains or lossesarelating to	Swaps receivable Swaps payable 7,511,410,000 $ (137,720,000) $ (543,520,000) 55,456,000 (380,073,000) (1,295,000) 1,079,175,000 – (1,716,604,000) – 5,950,388,000 $ (83,559,000) $ Borrowings related swaps	Swaps receivable Swaps payable 7,511,410,000 $ (137,720,000) $ (543,520,000) 55,456,000 (380,073,000) (1,295,000) 1,079,175,000 – (1,716,604,000) – 5,950,388,000 $ (83,559,000) $ Borrowings related swaps	Swaps receivable Swaps payable 32,514,000 $ (354,458,000) $ (7,577,000) (12,644,000) (2,436,000) 33,103,000 – (306,961,000) c – 30,994,000 22,501,000 $ (609,966,000) $ Loans related swaps	Swaps receivable Swaps payable 32,514,000 $ (354,458,000) $ (7,577,000) (12,644,000) (2,436,000) 33,103,000 – (306,961,000) c – 30,994,000 22,501,000 $ (609,966,000) $ Loans related swaps
	Swaps receivable 7,511,410,000 $ (543,520,000) (380,073,000) 1,079,175,000 (1,716,604,000) 5,950,388,000 $		Swaps receivable 32,514,000 $ (7,577,000) (2,436,000) – – 22,501,000 $
assets/liabilities still held at the reporting date	(104,257,000) $	56,794,000 $	(7,776,000) $	(10,859,000) $

a Included in net unrealized (losses) gains (OCR-2). b Included in currency translation adjustments (OCR-3). c Accretion.

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Effect of Derivative Instruments on the Statement of Income and Expenses

ADB reports changes in the fair value of its derivative instruments as part of net unrealized gains and losses in its Statement of Income and Expenses while all interest income, expenses, and related amortization of discounts, premiums, and fees are reported as part of revenue and expenses. These are summarized below:

	Location of Gain / (Loss) recognized in Income / Expenses on Derivatives	Amount of Gain / (Loss) recognized in income on Derivatives	Amount of Gain / (Loss) recognized in income on Derivatives
		2012	2011
Futures	Net Realized Gains (Losses)	–	(556,000) $
Investment related swaps Currency swaps Interest rate swaps	Net Unrealized (Losses) Gains Revenue from Investments Net Unrealized (Losses) Gains Revenue from Investments	33,171,000 (3,528,000) (2,708,000) (4,543,000)	(1,883,000) (5,536,000) (18,920,000) (5,362,000)
	Net Realized Gains from Investments	–	(6,990,000)
FX swaps	Net Unrealized (Losses) Gains Revenue from Investments	(3,755,000) 24,131,000	3,894,000 9,325,000
FX forward	Net Realized Gains (Losses)	–	63,000
Loans related swaps Currency swaps Interest rate swaps Borrowings related swaps Currency swaps Interest rate swaps FX swaps	Net Unrealized (Losses) Gains Revenue from Loans Net Unrealized (Losses) Gains Revenue from Loans Net Unrealized (Losses) Gains Borrowings and related expenses Net Unrealized (Losses) Gains Borrowings and related expenses Net Unrealized (Losses) Gains Borrowings and related expenses	42,768,000 16,196,000 (20,056,000) 6,010,000 (16,563,000) (14,413,000) 377,604,000 1,026,661,000 (98,204,000) 580,807,000 41,000 1,681,000 1,888,590,000	(25,409,000)
			(21,707,000) (17,641,000) 13,102,000 (44,525,000)
			(70,771,000)
			716,606,000 1,302,275,000 648,521,000 622,724,000 (2,000) 632,000
			3,290,756,000

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Counterparty Credit Risks

ADB undertakes derivative transactions with its eligible counterparties and transacts in various financial instruments as part of liquidity and asset/liability management purposes that may involve credit risks. For all investment securities and their derivatives, ADB manages credit risks by following the policies set forth in the Investment Authority and other risk management guidelines . ADB has a potential risk of loss if the swap counterparty fails to perform its obligations. In order to reduce such credit risk, ADB only transacts with counterparties eligible under ADB’s swap guidelines which include a requirement that the counterparties have a credit rating of A– or higher and generally requires entering into master swap agreements which contain legally enforceable close-out netting provisions for all counterparties with outstanding swap transactions. The reduction in exposure as a result of these netting provisions can vary as additional transactions are entered into under these agreements. The extent of the reduction in exposure may therefore change substantially within a short period of time following the balance sheet date.

ADB has entered into several agreements with its derivative counterparties under the Master Agreement of the International Swaps and Derivatives Association (ISDA) and the Master Agreement of the National Association of Financial Market Institutional Investors (NAFMII). The agreements provide for the right of a party to terminate if any of the various events of default and termination events specified occur. Events of default include failure to pay and cross default. Termination events include the situation where the long term unsecured and unsubordinated indebtedness of ADB or the counterparty ceases to be rated at least Baa3 by Moody’s Investor Service, Inc. or BBB– by Standard and Poor’s Ratings Group, or such indebtedness ceases to be rated by Moody’s or S&P. If ADB’s counterparties are entitled under the agreements to terminate their derivative transactions with ADB, ADB will be required to pay an amount equal to its net liability position with each counterparty (in the case of counterparties who have entered into the ISDA Master Agreement) and an amount equal to its gross liability position with each counterparty (in the case of counterparties who have entered into the NAFMII Master Agreement). The aggregate fair value of all derivative instruments that ADB has under ISDA Master Agreement that are in a net liability (negative marked-to-market) position as of 31 December 2012 is $353,799,000 ($456,030,000 – 2011). There is no gross liability position in the aggregate fair value of all derivative instruments that ADB has under the NAFMII Master Agreement as of 31 December 2012 (nil – 2011).

Counterparty credit risk is also mitigated by requiring counterparties to post collateral based on specified credit rating driven thresholds. As of 31 December 2012, ADB had received collateral of $4,152,782,000 ($3,319,857,000 – 2011) in connection with the swap agreements. Of this amount, $2,155,150,000 ($1,942,954,000 – 2011) was recorded as swap related collateral.

NOTE I—PROPERTY, FURNITURE, AND EQUIPMENT

In 1991, under the terms of an agreement with the Philippines (Government), ADB returned the former headquarters premises, which had been provided by the Government. In accordance with the agreement as supplemented by a memorandum of understanding, ADB was compensated $22,657,000 for the return of these premises. The compensation is in lieu of being provided premises under the agreement and accordingly, is deferred and amortized over the estimated life of the new headquarters building as a reduction of occupancy expense. The amortization for the year ended 31 December 2012 amounted to $408,000 ($396,000 – 2011) reducing depreciation expense for the new headquarters building from $4,342,000 ($4,342,000 – 2011) to $3,934,000 ($3,946,000 – 2011). At 31 December 2012, the unamortized deferred compensation balance (included in ACCOUNTS PAYABLE AND OTHER LIABILITIES – Miscellaneous) was $7,494,000 ($7,527,000 – 2011). At 31 December 2012 accumulated depreciation for property, furniture, and equipment was $222,062,000 ($201,868,000 – 2011).

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The changes in the property, equipment, and intangible assets during 2012 and 2011, as well as information pertaining to accumulated depreciation, are as follows:

Cost: Balance, 1 January 2012	Property, Furniture and Equipment
	Buildings Office Furniture and and Work in Land Improvments Equipment Progress	Total
	10,178,000 $ 209,261,000 $ 131,429,000 $ 12,451,000 $	363,319,000 $
Additions during the year Disposals during the year	– 2,568,000 21,014,000 (1,895,000) – – (3,079,000)	21,687,000 (3,079,000)
Balance, 31 December 2012	10,178,000 211,829,000 149,364,000 10,556,000	381,927,000
Accumulated Depreciation:
Balance, 1 January 2012 Depreciation during the year Disposals during the year	– (102,203,000) (99,665,000) – – (6,097,000) (17,122,000) – – 3,025,000 –	(201,868,000) (23,219,000) 3,025,000
Balance, 31 December 2012 Net Book Value, 31 December 2012	– (108,300,000) (113,762,000) –	(222,062,000)
	10,178,000 $ 103,529,000 $ 35,602,000 $ 10,556,000 $	159,865,000 $

Cost: Balance, 1 January 2011	Property, Furniture and Equipment
	Buildings Office Furniture and and Work in Land Improvments Equipment Progress	Total
	10,178,000 $ 201,607,000 $ 117,224,000 $ 17,460,000 $	346,469,000 $
Additions during the year Disposals during the year	– 7,654,000 16,878,000 (5,009,000) – – (2,673,000) –	19,523,000 (2,673,000)
Balance, 31 December 2011	10,178,000 209,261,000 131,429,000 12,451,000	363,319,000
Accumulated Depreciation:
Balance, 1 January 2011 Depreciation during the year Disposals during the year	– (96,205,000) (89,087,000) – – (5,998,000) (13,051,000) – – – 2,473,000 –	(185,292,000) (19,049,000) 2,473,000
Balance, 31 December 2011 Net Book Value, 31 December 2011	– (102,203,000) (99,665,000) –	(201,868,000)
	10,178,000 $ 107,058,000 $ 31,764,000 $ 12,451,000 $	161,451,000 $

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NOTE J—BORROWINGS

The key objective of ADB’s borrowing strategy is to raise funds at the most stable and lowest possible cost for the benefit of its borrowers. ADB uses financial derivative instruments in connection with its borrowing activities to increase cost efficiency, while achieving risk management objectives. Currency and interest rate swaps enable ADB to raise operationally needed currencies in a cost-efficient way and to maintain its borrowing presence in the major capital markets. Interest rate swaps are used to reduce interest rate mismatches arising from lending and liquidity operations.

In adopting ASC 825, ADB elected to fair value all borrowings with associated derivative instruments. This election allows ADB to apply a consistent accounting treatment between borrowings and their related swaps. ADB continues to report its borrowings that are not swapped at amortized cost.

Fair Value Disclosure

The office of risk management is primarily responsible for determining the fair value of the borrowings. Parameters and models used for valuation are subject to internal review and periodic external validation. Plain vanilla borrowings are valued using discounted cash flow methods with market-based observable inputs such as yield curves, foreign exchange rates, basis spreads and funding spreads. On some borrowings significant unobservable input is also used such as derived credit spread. Structured borrowings issued by ADB are valued using financial models that discount future cash flows and simulated expected cash flows. These involve the use of pay-off profiles within the realm of accepted market valuation models such as Hull-White and Black-Scholes. The model incorporates market observable inputs, such yield curves, foreign exchange rates, basis spreads, funding spreads, interest rate volatilities, equity index volatilities, and equity indices.

The fair value hierarchy of ADB’s borrowings carried at fair value as of 31 December 2012 and 2011 was as follows:

Borrowings Accrued interest on borrowings Total borrowings at fair value Borrowings Accrued interest on borrowings Total borrowings at fair value	31 December 2012	Fair Value Measurements	Fair Value Measurements
		Level 1
	58,563,029,000 $ 435,675,000	– $ –
	58,998,704,000 $	– $
	31 December 2011
		Level 1	Level 2 Level 3 47,609,798,000 $ 6,428,190,000 $ 428,067,000 80,240,000 48,037,865,000 $ 6,508,430,000 $
	54,037,988,000 $ 508,307,000	– $ –
	54,546,295,000 $	– $

As of 31 December 2012, the fair value of ADB’s borrowings reported at amortized cost was $6,841,374,000 ($5,448,616,000 – 2011).

The fair value of borrowings reported at amortized cost as of 31 December 2012 were all classified as Level 2 within the fair value hierarchy.

During the year ended 31 December 2012, there were no inter-level transfers in ADB’s borrowings.

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The following tables present the changes in the carrying amounts of ADB’s Level 3 borrowings for the years ended 31 December 2012 and 2011:

Balance, 1 January Total gains (losses) - (realized/unrealized) Included in earningsa Included in other comprehensive incomeb Issuances Maturities/Redemptions Balance, 31 December Accrued interest on borrowings Balance, 31 December (including accrued interest) The amount of total gains (losses) for the period included in earnings attributable to the change in net unrealized gains or lossesarelating to assets/liabilities still held at the reporting date aIncluded in net unrealized (losses) gains (OCR-2).

2012 2011 (6,428,190,000) $ (7,877,872,000) $ (140,013,000) 427,826,000 (180,682,000) 373,524,000 (2,258,231,000) (1,069,661,000) 1,779,306,000 1,717,993,000 (7,227,810,000) (6,428,190,000) (65,209,000) (80,240,000) (7,293,019,000) $ (6,508,430,000) $ (49,749,000) $ 28,282,000 $

bIncluded in currencytranslation adjustments(OCR-3).

The valuation techniques and quantitative information on significant unobservable inputs used in valuing ADB’s borrowings classified as Level 3 as of 31 December 2012 are presented below:

Borrowings	Valuation Technique Discounted cash flows	Unobservable Range Inputs (Weighted Average) Derived credit spread -1.83% to 0.99% (-0.93%)

The derived credit spread adjusts the discount rate in valuing the borrowings. A significant increase (decrease) in credit spreads generally increases (decreases) the fair value of the borrowings.

Refer to OCR-7 for Summary Statement of Borrowings.

NOTE K—CAPITAL STOCK, CAPITAL TRANSFERRED TO ASIAN DEVELOPMENT FUND, MAINTENANCE OF VALUE OF CURRENCY HOLDINGS, AND MEMBERSHIP

Capital Stock

On 29 April 2009, the Board of Governors of ADB adopted Resolution No. 336 increasing ADB’s authorized capital stock by 7,092,622 shares (200%), and the corresponding subscriptions for such increase by its members. Each member was entitled to subscribe for that number of additional shares equivalent to 200% of its allocated shares immediately prior to the effective date of the Resolution. The GCI V subscription period was concluded in January 2012 with 66 members (48 from regional and 18 from non-regional) out of 67 members subscribing to the additional 7,067,706 shares (282,708 paid-in shares and 6,784,998 callable shares).

The authorized capital stock of ADB as of 31 December 2012 consists of 10,638,933 shares (10,638,933 – 2011), of which 10,614,017 shares (10,583,580 – 2011) have been subscribed by members. Of the subscribed shares, 10,081,885 (10,052,666 – 2011) are “callable” and 532,132 (530,914 – 2011) are “paid-in”. The “callable” share capital is subject to call by ADB only as and when required to meet ADB’s

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obligations incurred on borrowings of funds for inclusion in its OCR or on guarantees chargeable to such resources. The “paid-in” share capital has been paid or is payable in installments, partly in convertible currencies and partly in the currency of the subscribing member which may be convertible. In accordance with Article 6, paragraph 3 of the Charter, ADB accepts nonnegotiable, noninterest-bearing demand obligations in satisfaction of the portion payable in the currency of the member, provided such currency is not required by ADB for the conduct of its operations. Nonnegotiable, noninterest-bearing demand obligations received on demand amounted to $335,723,000 ($282,001,000 – 2011), while those notes received with fixed encashment schedules totaled $455,183,000 ($296,990,000 – 2011).

As of 31 December 2012, all matured installments amounting to $6,096,303,000 ($5,322,254,000 – 2011) had been received. Installments not due aggregating $2,082,133,000 ($2,828,710,000 – 2011) were as follows:

For the Year ending 31 December:

2013 2014 2015	846,609,000 $ 846,609,000 388,915,000
	2,082,133,000 $

Capital Transferred to Asian Development Fund

Pursuant to the provisions of Article 19, paragraph 1(i) of the Charter, the Board of Governors has authorized the setting aside of 10% of the unimpaired “paid-in” capital paid by members pursuant to Article 6, paragraph 2(a) of the Charter and of the convertible currency portion paid by members pursuant to Article 6, paragraph 2(b) of the Charter as of 28 April 1973 to be used as a part of the Special Funds of ADB. The resources so set aside amounting to $73,172,000 as of 31 December 2012 ($73,094,000 – 2011) expressed in terms of the SDR on the basis of $1.53692 ($1.53527 – 2011) per SDR ($57,434,000 in terms of $1.20635 per 1966 dollar— Note B ), were allocated and transferred to the Asian Development Fund.

Maintenance of Value of Currency Holdings

Prior to 1 April 1978, the effective date of the Second Amendment to the IMF Articles, ADB implemented maintenance of value (MOV) in respect of holdings of member currencies in terms of 1966 dollars, in accordance with the provisions of Article 25 of the Charter and relevant resolutions of the Board of Directors. Since then, settlement of MOV has been put in abeyance.

In as much as the valuation of ADB’s capital stock and the basis of determining possible MOV obligations are still under consideration, notional amounts have been calculated provisionally in terms of the SDR as receivable from or payable to members in order to maintain the value of members’ currency holdings. The notional MOV amounts of receivables and payables are offset against one another and shown as net notional amounts required to maintain value of currency holdings in the CAPITAL AND RESERVES portion of the Balance Sheet. The carrying book value for such receivables and payables approximates its fair value.

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The net notional amounts as of 31 December 2012 consisted of (i) the increase of $1,219,836,000 ($1,044,331,000 – 2011) in amounts required to maintain the value of currency holdings to the extent of matured and paid-in capital subscriptions due to the increase in the value of the SDR in relation to the United States dollar during the period from 1 April 1978 to 31 December 2012 and (ii) the net decrease of $331,990,000 ($448,525,000 – 2011) in the value of such currency holdings in relation to the United States dollar during the same period. In terms of receivable from and payable to members, they are as follows:

Notional MOV Receivables Notional MOV Payables Total	2012 2011 1,240,310,000 $ 1,132,513,000 $ 352,464,000 536,707,000 887,846,000 $ 595,806,000 $

Membership

As of 31 December 2012 and 2011, ADB’s shareholders consist of 67 member countries, 48 countries from the region and 19 countries from outside the region (OCR-8) .

NOTE L—RESERVES

Ordinary Reserve and Net Income

Under the provisions of Article 40 of the Charter, the Board of Governors shall determine annually what part of the net income shall be allocated, after making provision for reserves, to surplus and what part, if any, shall be distributed to the members.

In May 2012, the Board of Governors approved the allocation of 2011 net income of $593,735,000, after appropriation of guarantee fees to special reserve, as follows: (i) $6,300,000 be added from Loan Loss Reserve; (ii) $22,882,000 representing the ASC 815/825 adjustments and the unrealized portion of net income from equity investments accounted for under the equity method, to Cumulative Revaluation Adjustments account; (iii) $417,153,000 to Ordinary Reserve; (iv) $120,000,000 to Asian Development Fund (ADF); and (v) $40,000,000 to Technical Assistance Special Fund (TASF).

In May 2011, the Board of Governors approved the allocation of 2010 net income of $614,489,000, after appropriation of guarantee fees to special reserve, as follows: (i) $45,900,000 be transferred from Loan Loss Reserve; (ii) $77,779,000 representing the ASC 815/825 adjustments and the unrealized portion of net income from equity investments accounted for under the equity method, to Cumulative Revaluation Adjustments account; (iii) $422,610,000 to Ordinary Reserve; (iv) $120,000,000 to ADF; and (v) $40,000,000 to TASF.

The restatement of the capital stock for purposes of these financial statements on the basis of the SDR instead of the 1966 dollar (Note B) resulted in a net credit of $4,540,000 to the Ordinary Reserve during the year ended 31 December 2012 ($6,925,000 – 2011). That credit is the decrease in the value of the matured and paid-in capital subscriptions caused by the change during the year in the value of the SDR in relation to the United States dollar not allocated to members as notional maintenance of value adjustments in accordance with resolutions of the Board of Directors. The unutilized funds of Asian Tsunami Fund amounting to $6,765,000 were also returned during the year.

Cumulative Revaluation Adjustments Account

In May 2002, the Board of Governors approved the allocation of net income representing the cumulative net unrealized gains (losses) on derivatives, as required by ASC 815 to a separate category of Reserves – Cumulative Revaluation Adjustments Account. Beginning 2008, the unrealized portion of net income

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from equity investments accounted under equity method is also transferred to this account. During 2012, the 2011 net unrealized gains on derivatives of $5,683,000 ($42,738,000 – 2011) and net gains from equity investments accounted under equity method of $17,199,000 ($35,041,000 – 2011) resulted to the credit balance of the Cumulative Revaluation Adjustments account at 31 December 2012 to $284,182,000 ($261,300,000 – 2011).

Special Reserve

The Special Reserve includes commissions on loans and guarantee fees received which are required to be set aside pursuant to Article 17 of the Charter to meet liabilities on guarantees. For the year ended 31 December 2012, guarantee fees amounting to $18,382,000 ($15,722,000 – 2011) were appropriated to Special Reserve.

Loan Loss Reserve

ADB sets aside Loan Loss Reserve as part of Capital and Reserves to be used as a basis for capital adequacy against the estimated expected loss in ADB’s sovereign and nonsovereign loans and guarantees portfolio. The loan loss reserve is estimated based on expected loss using ADB’s credit risk model net of allowance for loan losses recorded in the balance sheet.

In 2012, the loan loss reserve requirement was $193,800,000 ($200,100,000 – 2011).

Surplus

Surplus represents funds for future use to be determined by the Board of Governors. In 2012, there was no additional allocation to surplus.

Comprehensive (Loss) Income

Comprehensive (loss) income has two major components: net income and other comprehensive loss comprising gains and losses affecting equity that, under US GAAP, are excluded from net income. Other comprehensive loss includes items such as unrealized gains and losses on financial instruments classified as available for sale, translation adjustments, and pension and post-retirement liability adjustment.

The changes in Accumulated Other Comprehensive Loss balances for the years ended 31 December 2012 and 2011 expressed in thousands of US dollars were as follows:

Balance, 1 January Changes from period activity Balance, 31 December	Adjustments Accumulated Translation	Adjustments Accumulated Translation	Holding Gains Unrealized Investment	Holding Gains Unrealized Investment	Liability Adjustment- Pension/Postretirement	Liability Adjustment- Pension/Postretirement	Comprehensive Loss Accumulated Other
	2012	2011	2012	2011	2012	2011	2012 2011
	144,085 $ (38,042)	125,727 $ 18,358	617,578 $ (8,474)	742,256 $ (124,678)	(1,182,933) $ (329,990)	(921,328) $ (261,605)	(421,270) $ (53,345) $ (376,506) (367,925)
	106,043 $	144,085 $	609,104 $	617,578 $	(1,512,923) $	(1,182,933) $	(797,776) $ (421,270) $

NOTE M—INCOME AND EXPENSES

Total income from loans for the year ended 31 December 2012 was $770,486,000 ($649,599,000 – 2011). The average yield on the loan portfolio during the year was 1.56% (1.34% – 2011), excluding premium received on prepayment and other loan income. Premium on prepaid loans during 2012 amounted to $15,000 ($334,000 – 2011).

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Total income from investments including net realized gains on sales, net unrealized gains on derivatives, and interest earned for securities transferred under repurchase agreements and resale arrangements for the year ended 31 December 2012 was $433,746,000 ($432,663,000 – 2011). The annualized rate of return on the average investments held during the year, based on the portfolio held at the beginning and end of each month, was 1.69% (2.04% – 2011) excluding unrealized gains and losses on investments and 1.70% (2.20% – 2011) including unrealized gains and losses on investments.

Including net realized gains, equity investment operations resulted to a net income of $118,255,000 ($164,644,000 – 2011) for the year ended 31 December 2012, excluding equity investments related expenses. This included a total of $33,592,000 ($28,989,00 – 2011) share in the net gains of investee companies accounted for under the equity method, dividend income, gains on disposals, and other income of $4,450,000 ($14,081,000 – 2011), $89,725,000 ($122,723,000 – 2011), and $434,000 ($961,000 – 2011), respectively, offset by $9,948,000 ($2,109,000 – 2011) other than temporary impairment losses.

Income from other sources primarily included income received as executing agency amounting to $10,388,000 ($9,189,000 – 2011), interest income earned on bank accounts, staff accounts, and various securities from troubled debt restructuring totaled $4,156,000 ($6,621,000 – 2011), and reversals of expenses charged to prior years of $4,181,000 ($4,437,000 – 2011). No impairment losses on debt securities held under the nonsovereign operations incurred for the year ended 31 December 2012 ($19,798,000 – 2011).

Total borrowing expense of $504,140,000 ($362,419,000 – 2011) consisted of interest expense of $506,587,000 ($352,800,000 – 2011), amortization of borrowings’ issuance costs and other expenses of $13,782,000 ($15,116,000 – 2011), and net realized gains on redemption of bonds of $16,229,000 ($5,497,000 – 2011).

Total depreciation expense incurred for the year ended 31 December 2012 amounted to $22,811,000 ($18,653,000 – 2011).

ADB leases office spaces and other assets. Rental expenses under operating leases for the years ended 31 December 2012 and 2011 were $10,463,000 and $9,485,000, respectively. The minimum rental payments required under operating leases that have initial or noncancelable lease terms in excess of one year as of 31 December 2012 are as follows:

		Minimum
Year ending 31 December	future rentals
2013	$	4,807,000
2014		3,622,000
2015		1,847,000
2016		645,000
Later years		806,000

Administrative expenses (other than those pertaining directly to ordinary operations and special operations) for the year ended 31 December 2012 were apportioned between OCR and ADF in proportion to the relative volume of operational activities. Of the total administrative expenses of $654,963,000 ($589,811,000 – 2011), $283,063,000 ($254,829,000 – 2011) was charged to ADF. The balance of administrative expenses after allocation charged to OCR was reduced by the deferral of direct loan origination costs of $20,755,000 ($19,037,000 – 2011) related to new loans made effective for the year ended 31 December 2012 (Note B) .

For the year ended 31 December 2012, loss provision of $6,889,000 ($7,395,000 – 2011 write back) consisted of $11,758,000 additional loan loss provision ($5,657,000 – 2011) and $4,869,000 ($13,052,000 – 2011) write backs.

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The following table provides information on the unrealized gains or losses included in income for the years ended 31 December 2012 and 2011:

2012 Unrealized (losses) gains on: Borrowings and related swaps (380,550,000) $ Investments related swaps 30,463,000 Loan related swaps 22,206,000 FX swaps (3,714,000) Translation adjustments in non-functional currencies 684,000 Amortization of the ASC 815 transition adjustment – Total (330,911,000) $	2011
	30,161,000 $ (20,803,000) (8,605,000) 3,892,000 1,316,000
	(278,000)
	5,683,000 $

NOTE N—RELATED PARTY TRANSACTIONS

At 31 December 2012 and 2011, ADB had the following receivables from/payables to special funds and externally funded trust funds under ADB administration (Agency Trust Funds) resulting from administrative arrangements and operating activities which are included in Miscellaneous under OTHER ASSETS and ACCOUNTS PAYABLE AND OTHER LIABILITIES:

Amounts receivable from: Asian Development Fund Technical Assistance Special Fund Japan Special Fund Asian Development Bank Institute Asian Tsunami Fund Pakistan Earthquake Fund Regional Cooperation and Integration Fund Climate Change Fund Asia Pacific Disaster Response Fund ASEAN Infrastructure Fund Agency Trust Funds—net Staff Retirement Plan Total Amounts payable to: Technical Assistance Special Fund Staff Retirement Plan Total

2012 2011 37,894,000 $ 41,432,000 $ – 2,000 25,000 12,000 138,000 174,000 – 7,000 8,000 50,000 53,000 76,000 27,000 8,000 67,000 7,000 219,000 – 1,784,000 4,421,000 1,688,000 – 41,903,000 $ 46,189,000 $ 2,000 $ – $ – 7,566,000 2,000 $ 7,566,000 $

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NOTE O—STAFF RETIREMENT PLAN AND POSTRETIREMENT MEDICAL BENEFITS

Staff Retirement Plan

ADB has a contributory defined benefit Staff Retirement Plan (the Plan). Every employee, as defined under the Plan, shall, as a condition of service, become a participant from the first day of service, provided that at such a date, the employee has not reached the normal retirement age of 60. The Plan applies also to members of the Board of Directors who elect to join the Plan. Retirement benefits are based on length of service and highest average two years remuneration during eligible service. The Plan assets are segregated and are not included in the accompanying Balance Sheet. The costs of administering the Plan are absorbed by ADB, except for fees paid to the investment managers and related charges, including custodian fees, which are borne by the Plan.

Participants hired on or before 30 September 2006 are required to contribute 9 1/3% of their salary to the Plan while those hired after that date are not required to contribute to the plan. Participants may also make discretionary contributions. ADB’s contribution is determined at a rate sufficient to cover that part of the costs of the Plan not covered by the participants’ contributions.

Expected Contributions

ADB’s contribution to the SRP varies from year to year, as determined by the Pension Committee, which bases its judgment on the results of annual actuarial valuations of the assets and liabilities of the SRP. ADB is expected to contribute $46,964,000 to the Plan for 2013 based on budgeted contribution of 21%.

ADB’s staff members are expected to contribute $53,747,000 representing participants’ mandatory contribution of $11,647,000 and discretionary contributions of $42,100,000.

Investment Strategy

Contributions in excess of current benefits payments are invested in international financial markets and in a variety of investment vehicles. The Plan employs seven external asset managers and one global custodian who function within the guidelines established by the Plan’s Investment Committee. The investment of these assets, over the long term, is expected to produce higher returns than short-term investments. The investment policy incorporates the Plan’s package of desired investment return and tolerance for risk, taking into account the nature and duration of the Plan’s liabilities. The Plan’s assets are diversified among different markets and different asset classes. The use of derivatives for speculation, leverage or taking risks is prohibited. Selected derivatives are used for hedging and transactional efficiency purposes.

The Plan’s investment policy is periodically reviewed and revised to reflect the best interest of the Plan’s participants and beneficiaries. The current policy, adopted in January 2011, specifies an asset-mix structure of 70% of assets in equities and 30% in fixed income securities. At present, investments of the Plan’s assets are divided into three categories: US equity, Non-US equity, and Global fixed income. The Plan’s long-term target asset-mix is 40% US equity, 30% non-US equity and 30% global fixed income.

For the year ended 31 December 2012 the net return on the Plan assets was 13.6% (negative 0.9% – 2011). ADB expects the long-term rate of return on the assets to be 7.5% (7.5% – 2011).

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Assumptions

The assumed overall rate of return takes into account long-term return expectations of the underlying asset classes within the investment portfolio mix, and the expected duration of the Plan’s liabilities. Return expectations are forward looking and, in general, not much weight is given to short-term experience. Unless there is a drastic change in investment policy or market environment, as well as in the liability/benefit policy side, the assumed investment return of 7.5% on the Plan’s assets is expected to remain broadly the same, year to year.

Actuarial assumptions based on the 2005-2009 experience were used as the basis for the actuarial valuation as of 31 December 2012 and 2011. These include rates of withdrawal, incapacity retirement rates, mortality rates, percent of international staff who commute, currency reserve, and pattern of discretionary benefits withdrawal.

Postretirement Medical Benefits Plan

In 1993, ADB adopted a cost-sharing plan for retirees’ medical insurance premiums. Under the plan, ADB is obligated to pay 75% of the Group Medical Insurance Plan premiums for retirees, including retired members of the Board of Directors, and their eligible dependents who elected to participate. The cost-sharing plan is currently unfunded.

Generally accepted accounting principles require an actuarially determined assessment of the periodic cost of postretirement medical benefits.

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The following table sets forth the pension and postretirement medical benefits at 31 December 2012 and 2011:

Change in projected benefit obligation:	Pension	Benefits	Postretirement Medical Benefits	Postretirement Medical Benefits
	2012	2011	2012	2011
Projected benefit obligation at beginning of year Service cost Interest cost Plan participants' contributions Actuarial loss Benefits paid Projected benefit obligation at	2,527,474,000 $ 67,727,000 129,515,000 64,972,000 400,422,000 (93,682,000)	2,219,073,000 $ 62,795,000 124,079,000 53,516,000 157,104,000 (89,093,000)	322,631,000 $ 18,080,000 17,044,000 – 66,094,000 (3,223,000)	273,085,000 $ 14,466,000 15,661,000 – 22,318,000 (2,899,000)
end of year	3,096,428,000 $	2,527,474,000 $	420,626,000 $	322,631,000 $
Change in plan assets: Fair value of plan assets at beginning of year Actual return on plan assets Employer's contribution Plan participants' contributions Benefits paid Fair value of plan assets at end of year Funded status Amounts recognized in the Balance sheet consist of: Current liabilities Noncurrent liabilities Net amount recognized Amounts recognized in the Accumulated other comprehensive income consist of: Net actuarial loss Prior service cost (credit) Total amount recognized Weighted-average assumptions as of 31 December	1,377,926,000 $ 188,857,000 102,986,000 64,972,000 (93,682,000)	1,323,904,000 $ (11,442,000) 101,041,000 53,516,000 (89,093,000)	– $ – 3,223,000 – (3,223,000) – $ (420,626,000) $ (7,341,000) (413,285,000) (420,626,000) $ 153,926,000 $ – 153,926,000 $	– $ – 2,899,000 – (2,899,000)
	1,641,059,000 $ (1,455,369,000) $ – (1,455,369,000)	1,377,926,000 $ (1,149,548,000) $ – (1,149,548,000)		– $
				(322,631,000) $ (6,418,000) (316,213,000)
	(1,455,369,000) $ 1,358,996,000 $ –	(1,149,548,000) $ 1,090,554,000 $ –		(322,631,000) $
				92,376,000 $ –
	1,358,996,000 $	1,090,554,000 $		92,376,000 $
Discount rate	4.30%	5.05%	4.30%	5.05%
Expected return on plan assets Rate of compensation increase	7.50%	7.50%	N/A	N/A
varies w ith age and averages	4.00%	4.00%	4.00%	4.00%

For measurement purposes, a 7.0% annual rate of increase in the per capita cost of covered health care benefits was assumed for the valuation as of 31 December 2012 and 2011. The rate was assumed to decrease gradually to 5.0% for 2020 (5.0% for 2016 – 2011) and remain at the level thereafter.

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Components of net periodic benefit cost: Service cost Interest cost Expected return on plan assets Amortization of prior service cost Recognized actuarial loss Net periodic benefit cost	Pension	Benefits	Postretirement Medical Benefits	Postretirement Medical Benefits
	2012	2011	2012 18,080,000 $ 17,044,000 – – 4,544,000 39,668,000 $	2011
	67,727,000 $ 129,515,000 (114,857,000) – 57,980,000	62,795,000 $ 124,079,000 (116,831,000) 3,675,000 41,614,000		14,466,000 $ 15,661,000 – (2,710,000) 3,513,000
	140,365,000 $	115,332,000 $		30,930,000 $

The accumulated benefit obligation of the pension plan as of 31 December 2012 was $2,882,869,000 ($2,361,800,000 – 2011).

The estimated net loss for the defined benefit pension plans that will be amortized from accumulated other comprehensive income into net periodic benefit cost over the next fiscal year amounted to $92,701,000. The estimated net loss for the other postretirement benefits plan that will be amortized from accumulated other comprehensive income into net periodic benefit cost over the next fiscal year is $8,474,000.

A one-percentage-point change in assumed health care trend rates would have the following effects:

Effect on total service and interest cost components Effect on postretirement benefit obligation	1-Percentage- Point Increase 9,697,000 $ 87,585,000	1-Percentage- Point Decrease (7,245,000) $ (76,425,000)

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 31 December 2012:

		Pension	Postretirement	Postretirement
		Benefits	Medical Benefits
2013	$	111,635,000	$	7,341,000
2014		111,806,000		8,238,000
2015		118,849,000		9,188,000
2016		127,634,000		10,176,000
2017		134,451,000		11,295,000
2018–2022		822,908,000		74,341,000

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Fair Value Disclosure

The fair value of the plan asset’s financial instruments measured at fair value on a recurring basis as of 31 December 2012 and 2011 were reported based on the following:

31 December 2012 Cash and cash equivalents 55,067,000 $ Common/preferred stocks 384,190,000 Investment funds 675,728,000 Government or government- guaranteed securities 199,891,000 Corporate debt securities 196,759,000 Mortgage/Asset-backed securities: Mortgage-backed securities 58,589,000 Collateralized mortgage obligations 4,703,000 Asset-backed securities 1,372,000 Short term investments 88,108,000 Derivatives (138,000) Other asset/liabilitiesa—net (23,210,000) Total fair value of plan assets 1,641,059,000 $	31 December 2012	Fair Value Measurements	Fair Value Measurements
		Level 1	Level 2 Level 3 55,067,000 $ – $ – 21,000 – – 7,188,000 – 8,538,000 9,574,000 27,087,000 13,000 2,142,000 2,458,000 1,372,000 – 66,625,000 – (506,000) 103,000 (23,210,000) – 144,303,000 $ 12,169,000 $
		– $ 384,169,000 675,728,000 192,703,000 178,647,000 31,489,000 103,000 – 21,483,000 265,000 –
	1,641,059,000 $	1,484,587,000 $

a Incudes receivables and liabilities carried at amounts that approximate fair value.

31 December 2011 Cash and cash equivalents 27,171,000 $ Common/preferred stocks 345,980,000 Investment funds 556,977,000 Government or government- guaranteed securities 190,652,000 Corporate debt securities 157,809,000 Mortgage/Asset-backed securities: Mortgage-backed securities 54,346,000 Collateralized mortgage obligations 7,355,000 Asset-backed securities 1,734,000 Short term investments 35,021,000 Derivatives 4,674,000 Other asset/liabilitiesa—net (3,793,000) Total fair value of plan assets 1,377,926,000 $	31 December 2011	Fair Value Measurements	Fair Value Measurements
		Level 1	Level 2 Level 3 27,171,000 $ – $ – 12,000 – – 4,723,000 5,121,000 23,029,000 6,234,000 11,592,000 429,000 2,391,000 4,843,000 – 1,734,000 7,730,000 – 4,424,000 123,000 (3,793,000) – 77,267,000 $ 18,496,000 $
		– $ 345,968,000 556,977,000 180,808,000 128,546,000 42,325,000 121,000 – 27,291,000 127,000 –
	1,377,926,000 $	1,282,163,000 $
aIncudes receivables and liabilities carried at amounts that approximate fair value.

The fair values of the Plan investments are provided by the Plan’s global custodian from various independent pricing providers. The Plan’s investment committee and SRP investment unit meets periodically and are involved in overseeing the activities and performance of the investment portfolios. The accounting division in coordination with SRP investment unit evaluates the fair value in determining the hierarchy level and ensuring that the valuation models are validated and are consistent from period to period. All investments including equity securities, fixed income securities and derivatives are valued using quoted market prices where available. Some prices provided by the pricing provider were valued using market observable and/or significant unobservable inputs. Equity securities include common and preferred stocks and mutual funds. Fixed income securities include government and government-

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guaranteed securities, corporate obligations, asset and mortgage-backed securities, and short-term investments. Derivatives include futures, swaps and forward currency contracts.

The table below provides details of transfers between Levels 1 and 2 for the years ended 31 December 2012 and 2011:

Investments	Level 1 Level 2 (3,609,000) $ 3,609,000 $ 14,530,000 (14,530,000) (16,450,000) 16,450,000 (5,529,000) $ 5,529,000 $ 2012	2011	2011
	Level 1	Level 1	Level 2
Government or government-guaranteed securities
Transfers into (out of) Corporate debt securities Transfers into (out of) Mortgaged/asset-backed securities Transfers into (out of)	(3,609,000) $ 14,530,000 (16,450,000)	11,957,000 $ 38,458,000 12,336,000	(11,957,000) $ (38,458,000) (12,336,000)
	(5,529,000) $	62,751,000 $	(62,751,000) $

The inter-level transfers are attributed to the availability of market quotes.

The following tables present the changes in the carrying amounts of ADB’s pension plan Level 3 financial assets and financial liabilities for the years ended 31 December 2012 and 2011:

Balance, 31 December 2011 Total realized/unrealized (losses)/gains in:	Investments
	Common / preferred stocks Government or gov't.-guaranteed securities Corporate debt securities Mortgage / Asset- backed securities Derivatives
	12,000 $ 5,121,000 $ 6,234,000 $ 7,006,000 $ 123,000 $
Net increase in net assets available
for benefits Purchases Sales/Maturities Settlement and others Transfers into Level 3 Balance, 31 December 2012 Total unrealized gains (losses) included in income related to investments still held at the reporting date	9,000 141,000 431,000 40,000 (20,000) – – 1,822,000 – – – (4,203,000) (394,000) (449,000) – – – (20,000) (1,512,000) – – (1,059,000) 1,501,000 (2,614,000) –
	21,000 $ – $ 9,574,000 $ 2,471,000 $ 103,000 $
	21,000 $ – $ 436,000 $ 153,000 $ 103,000 $

Balance, 31 December 2010 Total realized/unrealized (losses)/gains in:	Investments
	Common / preferred stocks Government or gov't.-guaranteed securities Corporate debt securities Mortgage / Asset- backed securities Derivatives
	– $ – $ – $ – $ – $
Net increase in net assets available
for benefits Purchases Sales/Maturities Settlement and others Transfers into Level 3 Balance, 31 December 2011 Total unrealized gains (losses) included in income related to investments still held at the reporting date	(56,000) 384,000 (267,000) 107,000 123,000 68,000 900,000 6,501,000 3,818,000 – – – – – – – – – – – – 3,837,000 – 3,081,000 –
	12,000 $ 5,121,000 $ 6,234,000 $ 7,006,000 $ 123,000 $
	(56,000) $ 384,000 $ (267,000) $ 107,000 $ 123,000 $

Transfers into and out of Level 3 in 2012 are attributed to the availability of observable inputs and in 2011 are primarily the result of refining ADB’s valuation approach.

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NOTE P—OTHER FAIR VALUE DISCLOSURES

The carrying amounts and estimated fair values of ADB’s financial instruments as of 31 December 2012 and 2011 are summarized below:

On-balance sheet financial instruments: ASSETS: Due from banks Investments (Note D) Securities transferred under repurchase agreement Securities purchased under resale arrangement Loans outstanding (Note E) Available for sale equity investments (Note G) Receivable from swaps - borrowings (Note H) Receivable from swaps - others (Note H) Swap related collateral Future guarantee receivable LIABILITIES: Borrowings (Note J) Payable for swaps - borrowings (Note H) Payable for swaps - others (Note H) Payable under securities repurchase agreement Payable for swap related collateral Guarantee liability	2012	2012	2011
	Carrying Amounta	Estimated Fair Value	Carrying Estimated Amounta Fair Value 187,989,000 $ 187,989,000 $ 21,508,269,000 21,508,269,000 330,044,000 330,044,000 395,498,000 395,498,000 49,759,260,000 51,378,685,000 297,741,000 297,741,000 31,373,104,000 31,373,104,000 6,220,207,000 6,220,207,000 1,942,954,000 1,942,954,000 13,857,000 13,857,000 58,834,767,000 59,994,911,000 27,465,365,000 27,465,365,000 6,576,366,000 6,576,366,000 330,820,000 330,820,000 1,942,954,000 1,942,954,000 13,857,000 13,857,000
	263,441,000 $ 23,778,015,000 347,453,000 333,884,000 52,837,145,000 271,213,000 32,418,962,000 9,171,987,000 2,155,150,000 21,725,000 64,779,778,000 28,173,269,000 8,979,653,000 350,416,000 2,155,150,000 21,725,000	263,441,000 $ 23,778,015,000 347,453,000 333,884,000 54,082,216,000 271,213,000 32,418,962,000 9,171,987,000 2,155,150,000 21,725,000 65,840,078,000 28,173,269,000 8,979,653,000 350,416,000 2,155,150,000 21,725,000

a The carrying amount for borrow ings are inclusive of accrued interest.

Off-balance sheet financial instruments: ASSETS: Future guarantee receivable LIABILITIES: Guarantee liability	Estimated Fair Value
	2012 2011 15,016,000 $ 19,031,000 $ 15,016,000 19,031,000

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As of 31 December 2012 and 2011, ADB has no material assets or liabilities measured at fair value on a non-recurring basis.

NOTE Q—SPECIAL AND OTHER FUNDS

ADB’s operations include special operations, which are financed from special funds resources. The OCR and special funds resources are at all times used, committed, and invested entirely separate from each other. The Board of Governors may approve allocation of the net income of OCR to special funds, based on the funding and operational requirements for the funds. The administrative and operational expenses pertaining to the OCR and special funds are charged to the respective special funds. The administrative expenses of ADB are allocated amongst OCR and special funds and are settled regularly between the OCR and the special funds.

In addition, ADB, alone or jointly with donors, administers on behalf of the donors, including members of ADB, their agencies and other development institutions, projects/programs supplementing ADB’s operations. Such projects/programs are funded with external funds administered by ADB and with external funds not under ADB’s administration (referred as trust funds). ADB charges administrative fees for external funds administered by ADB. The trust funds are restricted for specific uses including technical assistance to borrowers and for regional programs, grants for projects, and loans. The responsibilities of ADB under these arrangements range from project processing to project implementation including the facilitation of procurement of goods and services. These funds are held in trust with ADB, and are held in a separate investment portfolio. The assets of trust funds are not commingled with ADB’s resources, nor are they included in the assets of ADB.

Special funds and trust funds are not included in the assets of OCR. The breakdown as of 31 December 2012 and 2011 is as follows:

Special Funds	2012	No.	2011
	Total Net Assets		Total Net Assets	No.
Asian Development Fund	33,345,653,000 $	1	33,054,725,000 $	1
Technical Assistance Special Fund Japan Special Fund Asian Development Bank Institute Pakistan Earthquake Fund Regional Cooperation and Integration Fund Climate Change Fund Asia Pacific Disaster Response Fund Subtotal	141,166,000 98,072,000 10,337,000 4,427,000 1,651,000 7,884,000 10,254,000	1 1 1 1 1 1 1 8	225,111,000 94,133,000 9,836,000 4,553,000 4,143,000 14,242,000 12,360,000	1 1 1 1 1 1 1
	33,619,444,000		33,419,103,000	8
Trust Funds (including project specific cofinancing)	1,752,357,000	92	1,527,241,000	91
Total	35,371,801,000 $	100	34,946,344,000 $	99

During the year ended 31 December 2012, a total of $9,796,000 ($9,088,000 – 2011) was recorded as compensation for administering projects/programs under Trust Funds. The amount has been included in REVENUE From other sources—net.

98

OCR-9

continued

NOTE R—VARIABLE INTEREST ENTITIES

An entity is subject to the ASC 810 variable interest entity (VIE) Subsections and is considered a VIE if it (i) lacks equity that is sufficient to permit the entity to finance its activities without additional subordinated financial support from other parties; or (ii) if holders of the equity investment at risk lack decision-making rights about the entity’s activities that most significantly impact entity’s economic performance; or do not have the obligation to absorb the expected losses or the right to receive the expected residual returns of the entity.

A VIE is consolidated by the primary beneficiary, which is the party that 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.

As of 31 December 2012, ADB did not identify any VIE in which ADB is the primary beneficiary, requiring consolidation in OCR financial statements. ADB may hold variable interests in VIE, which requires disclosures.

The review of ADB’s loan, equity investments, and guarantee portfolio, has identified 29 (13 – 2011) investments in VIEs in which ADB is not the primary beneficiary. These non-consolidated VIEs are operating entities where the total equity invested is considered insufficient to finance its activities without additional subordinated financial support. These VIEs are in the finance, telecommunication, and energy sectors.

ADB’s involvement with these non-consolidated VIEs includes loans, guarantees and equity investments. Based on the most recent available data from these VIEs at 31 December 2012, the assets of these nonconsolidated VIEs totaled $59,671,198,000 ($1,795,139,000 – 2011).

The table below shows the carrying value of ADB interests in the non-consolidated VIEs and the maximum exposure to loss of these interests. For guarantees, the maximum exposure is the notional amount of such guarantee.

Carrying value of the ADB’s Variable Interests Assets Liabilities Maximum Exposure to Loss in Nonconsolidated VIEs Loans Equity Investments Guarantees Total	2012 1,117,386,000 $ 6,516,000 936,925,000 $ 225,443,000 133,416,000 1,295,784,000 $	2011
		397,165,000 $ 8,125,000 304,465,000 $ 84,575,000 157,945,000
		546,985,000 $

99

OCR-9

continued

NOTE S—SEGMENT REPORTING

Based on an evaluation of OCR’s operations, management has determined that OCR has only one reportable segment since OCR does not manage its operations by allocating resources based on a determination of the contribution to net income from individual borrowers.

The following table presents OCR’s loan, guarantee and equity investments outstanding balances and associated revenue, by geographic region, as of and for the years ended 31 December 2012 and 2011:

Country People’s Republic of China Indonesia India Philippines Pakistan Others Total	2012	2012	2011
	Outstanding Balance	Revenue	Outstanding Balance Revenue 12,543,421,000 $ 215,674,000 $ 10,044,028,000 168,538,000 10,721,780,000 82,133,000 6,150,159,000 67,901,000 5,672,813,000 49,111,000 7,592,869,000 125,994,000 52,725,070,000 $ 709,351,000 $
	13,429,625,000 $ 9,590,007,000 11,685,507,000 6,346,671,000 5,425,520,000 9,213,959,000	199,942,000 $ 171,934,000 123,514,000 77,410,000 59,036,000 195,509,000
	55,691,289,000 $	827,345,000 $

Revenue comprises income from loan charges, earnings from equity investments, and guarantee fees.

For the year ended 31 December 2012, sovereign loans to three countries (two – 2011) generated in excess of 10 percent of revenue; this amounted to $189,246,000, $163,068,000, and $103,683,000 ($162,394,000 and $158,802,000 – 2011).

NOTE T—SUBSEQUENT EVENTS

ADB has evaluated subsequent events after 31 December 2012 through 8 March 2013, the date these Financial Statements are available for issuance. During this period, ADB has raised additional borrowings of approximately $2.6 billion in various currencies.

100

ASIAN DEVELOPMENT FUND MANAGEMENT’S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING

The management of Asian Development Bank (“ADB”) is responsible for establishing and maintaining adequate internal control over financial reporting. ADB’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of special purpose financial statements in accordance with accounting policies as described in Note B of the special purpose financial statements.

ADB’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of ADB; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with accounting policies as described in Note B of the special purpose financial statements, and that receipts and expenditures of ADB are being made only in accordance with authorizations of management and directors of ADB; and (iii) provide reasonable assurance regarding prevention or timely detection and correction of unauthorized acquisition, use, or disposition of ADB’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 misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

ADB’s management assessed the effectiveness of ADB’s internal control over financial reporting as of 31 December 2012. In making this assessment, ADB’s management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission in Internal Control – Integrated Framework. Based on that assessment, management believes that as of 31 December 2012, ADB’s internal control over financial reporting is effective based upon the criteria established in Internal Control – Integrated Framework.

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Haruhiko Kuroda
President
Thierry de Longuemar
Vice-President (Finance and Risk Management)
----- End of picture text -----

Simon T. Bradbury Controller

8 March 2013

101

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Deloitte & Touche LLP Certified Public Accountants Unique Entity No. T08LL0721A 6 Shenton Way, Tower Two #32-00 Singapore 068809

Tel: +65 6224 8288 Fax: +65 6538 6166 www.deloitte.com

INDEPENDENT AUDITORS’ REPORT

To the Board of Directors and the Board of Governors of Asian Development Bank

We have audited management's assertion, included in the accompanying Management’s Report on Internal Control over Financial Reporting, that Asian Development Bank ("ADB") maintained effective internal control over financial reporting as of December 31, 2012, based on the criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. ADB's management is responsible for maintaining effective internal control over financial reporting and for its assertion of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on management's assertion based on our audit.

We conducted our audit in accordance with attestation standards established by the American Institute of Certified Public Accountants. 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. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

ADB’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of special purpose financial statements in accordance with accounting policies as described in Note B to the special purpose financial statements. ADB'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 ADB; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with accounting policies as described in Note B to the special purpose financial statements, and that receipts and expenditures of ADB are being made only in accordance with authorizations of management and directors of ADB; and (3) provide reasonable assurance regarding prevention or timely detection and correction of unauthorized acquisition, use, or disposition of ADB’s assets that could have a material effect on the financial statements.

102

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Because of the inherent limitations of internal control over financial reporting, including the possibility of collusion or improper management override of controls, material misstatements due to error or fraud may not be prevented or detected and corrected on a timely basis. Also, projections of any evaluation of the effectiveness of the internal control over financial reporting to future periods are subject to the risk that the controls may become inadequate because of changes in conditions or that the degree of compliance with the policies or procedures may deteriorate.

In our opinion, management’s assertion that ADB maintained effective internal control over financial reporting as of December 31, 2012, is fairly stated, in all material respects, based on the criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission.

We have also audited, in accordance with auditing standards generally accepted in the United States of America, the accompanying special purpose statement of assets, liabilities, and fund balances of Asian Development Bank (“ADB”) – Asian Development Fund as of December 31, 2012 and 2011, and the related special purpose statements of revenue and expenses, comprehensive income (loss), changes in fund balances and cash flows for the years then ended and the related notes to the special purpose financial statements. Our report dated March 8, 2013 expressed an unqualified opinion on those special purpose financial statements.

==> picture [191 x 28] intentionally omitted <==

Public Accountants and Certified Public Accountants

Singapore March 8, 2013

103

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Deloitte & Touche LLP Certified Public Accountants Unique Entity No. T08LL0721A 6 Shenton Way, Tower Two #32-00 Singapore 068809

Tel: +65 6224 8288 Fax: +65 6538 6166 www.deloitte.com

INDEPENDENT AUDITORS’ REPORT

To the Board of Directors and the Board of Governors of Asian Development Bank

We have audited the accompanying special purpose statements of assets, liabilities, and fund balances of Asian Development Bank (“ADB”) – Asian Development Fund as of December 31, 2012 and 2011, and the related special purpose statements of revenue and expenses, comprehensive income (loss), changes in fund balances, and cash flows for the years then ended, and the related notes to the special purpose financial statements.

Management’s Responsibility for the Financial Statements

Management is responsible for the preparation and fair presentation of these special purpose financial statements in accordance with the accounting policies described in Note B to the special purpose financial statements. Management is also responsible for 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 special purpose financial statements are free from material misstatement.

An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditor’s 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.

104

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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 special purpose financial statements referred to above present fairly, in all – material respects, the assets, liabilities, and fund balances of ADB Asian Development Fund as of December 31, 2012 and 2011, and its revenues and expenses and cash flows for the years then ended, in accordance with the accounting policies described in Note B to the special purpose financial statements.

Basis of Accounting

We draw attention to Note B to the special purpose financial statements, which describes the – basis of accounting. The financial statements are prepared by ADB Asian Development Fund in accordance with the accounting policies described in Note B to the special purpose financial statements, which is a basis of accounting other than accounting principles generally accepted in the United States of America. Our opinion is not modified with respect to this matter.

Report on Management’s Assertion on Internal Control over Financial Reporting

We have also audited, in accordance with attestation standards established by the American Institute of Certified Public Accountants, management’s assertion that ADB maintained effective internal control over financial reporting as of December 31, 2012, based on the criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated March 8, 2013 expressed an unqualified opinion on management’s assertion that ADB maintained effective internal control over financial reporting.

Restriction on Use

This report is intended solely for the information and use of the Board of Governors, Board of Directors, management, and members of the ADB and is not intended to be used and should not be used by anyone other than these specified parties.

==> picture [192 x 27] intentionally omitted <==

Public Accountants and Certified Public Accountants

Singapore March 8, 2013

105

ADF-1

ASIAN DEVELOPMENT BANK—ASIAN DEVELOPMENT FUND SPECIAL PURPOSE STATEMENT OF ASSETS, LIABILITIES, AND FUND BALANCES 31 December 2012 and 2011

Expressed in Thousands of United States Dollars

ASSETS DUE FROM BANKS INVESTMENTS (Notes C and K) Government or government-guaranteed obligations Time deposits SECURITIES PURCHASED UNDER RESALE ARRANGEMENT (Note C) LOANS OUTSTANDING (ADF-6) (Notes D and K) Sovereign Less—allowance for HIPC Debt Relief ACCRUED REVENUE On investments On loans OTHER ASSETS (Notes E and F)	84,519 $ 4,666,668 $ 1,512,645 6,179,313 340,177 29,164,998 77,937 29,087,061 48,049 70,060 118,109 231,177 2012	84,519 $ 4,666,668 $ 1,512,645 6,179,313 340,177 29,164,998 77,937 29,087,061 48,049 70,060 118,109 231,177 2012	2011	2011
	4,666,668 $ 1,512,645		4,124,683 $ 1,672,716	2,559 $ 5,797,399 335,818 29,435,680 110,934 257,765
	29,164,998 77,937		29,514,607 78,927
	48,049 70,060		44,453 66,481
TOTAL		36,040,356 $		35,940,155 $
LIABILITIES AND FUND BALANCES PAYABLE TO RELATED FUNDS (Notes E and G) ADVANCE PAYMENTS ON CONTRIBUTIONS (Note F) UNDISBURSED COMMITMENTS (Notes J and K) TOTAL LIABILITIES FUND BALANCES (ADF-4) Contributions received (ADF-7) Contributed resources (Note F) Unamortized discount Set-aside resources (Note H) Transfers from Ordinary Capital Resources and Technical Assistance Special Fund Nonnegotiable, noninterest-bearing demand obligations on account of contribution (Note F) Accumulated surplus Accumulated other comprehensive loss (Note I)	37,894 $ 207,250 2,449,559 2,694,703 35,592,225 $ (53,998) 35,538,227 73,172 1,223,619 36,835,018 (2,328,707) 1,384,711 (2,545,369) 33,345,653		41,432 $ 220,848 2,623,150 2,885,430 36,515,272 $ (64,691) 36,450,581 73,094 1,103,556 37,627,231 (2,402,167) 1,642,581 (3,812,920) 33,054,725	41,432 $ 220,848 2,623,150
TOTAL	36,040,356 $		35,940,155 $

The accompanying notes are an integral part of these special purpose financial statements (ADF-8).

106

ADF-2

ASIAN DEVELOPMENT BANK—ASIAN DEVELOPMENT FUND SPECIAL PURPOSE STATEMENT OF REVENUE AND EXPENSES For the Years Ended 31 December 2012 and 2011

Expressed in Thousands of United States Dollars

REVENUE From loans (Note D) From investments (Note C) From other sources EXPENSES Grants (Note J) Administrative expenses (Note G) Amortization of discounts on contributions Financial expenses NET REALIZED GAINS FROM INVESTMENTS (Gains reclassified from other comprehensive income) NET UNREALIZED GAINS (LOSSES)	314,851 $ 83,066 33 397,950 $ 383,647 283,063 15,098 17 681,825 814 25,191 2012	2011
		316,186 $ 96,914 142 413,242 $ 1,120,579 254,829 13,362 18 1,388,788 9,094 (10,328)
REVENUE LESS THAN EXPENSES	(257,870) $	(976,780) $

The accompanying notes are an integral part of these special purpose financial statements (ADF-8).

107

ADF-3

ASIAN DEVELOPMENT BANK—ASIAN DEVELOPMENT FUND SPECIAL PURPOSE STATEMENT OF COMPREHENSIVE INCOME (LOSS) For the Years Ended 31 December 2012 and 2011 Expressed in Thousands of United States Dollars

REVENUE LESS THAN EXPENSES (ADF-2) Other comprehensive income (loss) (Note I) Currency translation adjustments Unrealized investment holding losses Unrealized investment holding losses during the period Reclassification adjustments for gains included in net income Total other comprehensive income (loss)	2012 (257,870) $ 1,279,254 (10,889) (814) 1,267,551	2011
		(976,780) $
		(687,552) (6,271) (9,094)
		(702,917)
COMPREHENSIVE INCOME (LOSS)	1,009,681 $	(1,679,697) $

The accompanying notes are an integral part of these special purpose financial statements (ADF-8).

108

ADF-4

ASIAN DEVELOPMENT BANK—ASIAN DEVELOPMENT FUND SPECIAL PURPOSE STATEMENT OF CHANGES IN FUND BALANCES For the Years Ended 31 December 2012 and 2011 Expressed in Thousands of United States Dollars

							Nonnegotiable,	Nonnegotiable,			Accumulated	Accumulated
						Transfers	Noninterest-					Other
	Contributed		Set-Aside			from OCR	**bearing Demand **		Accumulated		Comprehensive
	Resources		Resources			& TASF	Obligations			Surplus		Loss		Total
Balance, 1 January 2011	$	34,383,559	$	73,320	$	983,636	$	(2,298,983)	$	2,619,361	$	(3,110,003)	$	32,650,890
Comprehensive loss
for the year 2011 (Note I)										(976,780)		(702,917)		(1,679,697)
Change in amounts available
for operational commitments
Contributed Resources		2,058,428												2,058,428
Unamortized Discount		8,594												8,594
Change in nonnegotiable,
noninterest-bearing
demand obligations								(103,184)						(103,184)
Transfer from ordinary
capital resources						120,000								120,000
Change in SDR value of
set-aside resources				(226)										(226)
Change in value of transfers
from Technical Assistance
Special Fund						(80)								(80)
Balance, 31 December 2011	$	36,450,581	$	73,094	$	1,103,556	$	(2,402,167)	$	1,642,581	$	(3,812,920)	$	33,054,725
Comprehensive (loss) income
for the year 2012 (Note I)										(257,870)		1,267,551		1,009,681
Change in amounts available
for operational commitments
Contributed Resources		(923,047)												(923,047)
Unamortized Discount		10,693												10,693
Change in nonnegotiable,
noninterest-bearing
demand obligations								73,460						73,460
Transfer from ordinary
capital resources						120,000								120,000
Change in SDR value of
set-aside resources				78										78
Change in value of transfers
from Technical Assistance
Special Fund						63								63
Balance, 31 December 2012	$	35,538,227	$	73,172	$	1,223,619	$	(2,328,707)	$	1,384,711	$	(2,545,369)	$	33,345,653

The accompanying notes are an integral part of these special purpose financial statements (ADF-8).

109

ADF-5

ASIAN DEVELOPMENT BANK—ASIAN DEVELOPMENT FUND SPECIAL PURPOSE STATEMENT OF CASH FLOWS For the Years Ended 31 December 2012 and 2011

Expressed in Thousands of United States Dollars

CASH FLOWS FROM OPERATING ACTIVITIES Interest charges on loans received Interest on investments received Interest received for securities purchased under resale arrangements Cash received from other sources Administrative expenses paid Grants disbursed Financial expenses paid Net Cash Used in Operating Activities CASH FLOWS FROM INVESTING ACTIVITIES Sales of investments Maturities of investments Purchases of investments Receipts from securities purchased under resale arrangements Payments for securities purchased under resale arrangements Principal collected on loans Loans disbursed Net Cash Used in Investing Activities CASH FLOWS FROM FINANCING ACTIVITIES Contributions received and encashed1 Cash received from Ordinary Capital Resources Net Cash Provided by Financing Activities Effect of Exchange Rate Changes on Due from Banks Net Increase (Decrease) in Due from Banks Due from Banks at Beginning of Year Due from Banks at End of Year RECONCILIATION OF REVENUE LESS THAN EXPENSES TO NET CASH USED IN OPERATING ACTIVITIES: Revenue less than expenses (ADF-2) Adjustments to reconcile revenue less than expenses to net cash used in operating activities: Amortization of discounts/premiums on investments Amortization of discount on donor’s contributions Grants approved and effective Capitalized charges on loans Net gain on sales of investments Change in disbursed grants Change in advances under technical assistance grants Change in accrued revenue on investments and loans Change in accrued expenses Change in other assets	2012 286,332 $ 100,318 278 33 (286,598) (529,418) (17) (429,072) 23,600 147,082,803 (147,483,985) 100,484,125 (100,528,530) 1,111,248 (1,262,310) (573,049) 961,410 120,000 1,081,410 2,671 81,960 2,559 84,519 $ (257,870) $ 20,246 15,098 383,647 (23,564) (814) (557,354) 24,871 (7,671) (3,535) 3,065	2011
		299,238 $ 108,027 182 142 (242,025) (510,923) (18)
		(345,377)
		197,793 143,575,619 (144,354,526) 82,931,472 (82,911,907) 1,066,602 (1,361,689)
		(856,636)
		1,082,821 120,000
		1,202,821
		(829)
		(21) 2,580
		2,559 $
		(976,780) $ 9,772 13,362 1,120,579 (23,540) (9,094) (473,343) (36,901) 8,114 12,805 (679)
Exchange (gains) losses—net	(25,191)	10,328
Net Cash Used in Operating Activities	(429,072) $	(345,377) $

Supplementary disclosure on noncash financing activities: 1 Nonnegotiable, noninterest-bearing demand promissory notes amounting to $962,630 ($1,023,942 – 2011) were received from contributing members. The accompanying notes are an integral part of these special purpose financial statements (ADF-8)

110

ASIAN DEVELOPMENT BANK—ASIAN DEVELOPMENT FUND SPECIAL PURPOSE SUMMARY STATEMENT OF LOANS 31 December 2012 and 2011 Expressed in Thousands of United States Dollars

Borrowers/Guarantors1	Undisbursed Loans Loans Balances of Not Yet Outstanding Effective Loans2,3 Effective4	Undisbursed Loans Loans Balances of Not Yet Outstanding Effective Loans2,3 Effective4	Undisbursed Loans Loans Balances of Not Yet Outstanding Effective Loans2,3 Effective4	Total Loans	Percent of Total Loans
Afghanistan Armenia Azerbaijan Bangladesh Bhutan Cambodia Cook Islands Georgia Indonesia Kazakhstan Kiribati Kyrgyz Republic Lao People’s Democratic Republic Republic of the Maldives Marshall Islands Federated States of Micronesia Mongolia Myanmar Nepal Pakistan Palau Papua New Guinea Philippines Samoa Solomon Islands Sri Lanka Tajikistan Tonga Timor-Leste Tuvalu Uzbekistan Vanuatu Viet Nam Regional TOTAL – 31 December 2012 Allowance for HIPC Debt Relief NET BALANCE – 31 December 2012 NET BALANCE – 31 December 2011	669,460 $ 186,502 47,304 6,096,698 172,956 965,598 29,219 318,139 1,316,540 6,963 13,823 601,213 1,101,650 115,827 70,489 50,822 610,526 590,813 1,552,998 6,396,848 3,427 320,165 723,499 127,169 48,386 2,621,663 338,409 37,071 – 6,529 197,263 50,408 3,775,048 1,573 29,164,998 $ (77,937) 29,087,061 $ 29,435,680 $	91,667 $ 122,097 5,580 1,422,143 34,051 237,672 835 240,040 72,536 – 18,045 137,413 45,739 7,679 – 7,322 132,680 – 544,703 407,586 – 276,359 – 9,628 – 288,478 10,577 – 9,076 – 436,506 10,310 1,433,410 2,600 6,004,732 $ – 6,004,732 $ 5,655,083 $	– $ 40,068 – 381,792 8,318 210,020 – 47,615 – – – 10,196 67,767 – 4,983 – 85,348 – – 74,310 – 41,465 – – 10,754 154,250 – – – – 133,371 4,878 533,657 – 1,808,792 $ – 1,808,792 $ 1,270,413 $	761,127 $ 348,667 52,884 7,900,633 215,325 1,413,290 30,054 605,794 1,389,076 6,963 31,868 748,822 1,215,156 123,506 75,472 58,144 828,554 590,813 2,097,701 6,878,744 3,427 637,989 723,499 136,797 59,140 3,064,391 348,986 37,071 9,076 6,529 767,140 65,596 5,742,115 4,173 36,978,522 $ (77,937) 36,900,585 $ 36,361,176 $	2.06 0.94 0.14 21.37 0.58 3.82 0.08 1.64 3.76 0.02 0.09 2.02 3.29 0.33 0.20 0.16 2.24 1.60 5.67 18.60 0.01 1.73 1.96 0.37 0.16 8.29 0.94 0.10 0.02 0.02 2.07 0.18 15.53 0.01
					100.00

• 1 Loans other than those made directly to a member or to its central bank have been guaranteed by the member.

2 Loans negotiated before 1 January 1983 were denominated in current United States dollars. Loans negotiated after that date are denominated in special drawing rights (SDR) for the purpose of commitment. The undisbursed portions of such SDR loans are translated into United States dollars at the applicable exchange rates as of the end of a reporting period. Of the undisbursed balances, ADB has entered into irrevocable commitments to disburse various amounts totaling $119,652 ($43,374 – 2011).

111

ADF-6

MATURITY OF EFFECTIVE LOANS

Twelve Months Ending 31 December 2013 2014 2015 2016 2017	Amount 1,683,405 $ 1,333,446 1,414,594 1,522,743 1,633,619	Five Years Ending 31 December 2022 2027 2032 2037 2042 2047 2052 Total	Amount
			8,812,307 7,594,795 5,790,469 3,407,398 1,612,913 336,899 27,142
			35,169,730 $

SUMMARY OF CURRENCIES RECEIVABLE ON LOANS OUTSTANDING

Currency Australian dollar Canadian dollar Danish krone Euro Japanese yen Korean won Malaysian ringgit New Zealand dollar	2012 75,137 $ 272,867 28,013 2,061,778 5,177,150 25,099 897 1,564	2011 77,064 $ 279,083 28,796 2,075,806 6,073,053 23,798 891 1,560	Currency Norwegian krone Pound sterling Singapore dollar Swedish krona Swiss franc Thai baht United States dollar Special Drawing Rights Total	2012 119,929 238,490 90 96,249 118,850 868 2,088,177 18,859,840 29,164,998 $	2011
					116,944 232,739 88 94,539 120,328 873 2,122,491 18,266,554
					29,514,607 $

• 3 Refer to the unwithdrawn portions of effective loans as of 31 December 2012.

• 4 Refer to approved loans that have not become effective as of 31 December 2012, pending borrowers' compliance with effectiveness conditions specified in the loan regulations and the loan agreements.

The accompanying notes are an integral part of these special purpose financial statements (ADF-8).

112

ADF-7

ASIAN DEVELOPMENT BANK—ASIAN DEVELOPMENT FUND SPECIAL PURPOSE STATEMENT OF RESOURCES 31 December 2012

Expressed in Thousands of United States Dollars

SPECIAL PURPOSE STATEMENT OF RESOURCES 31 December 2012 Expressed in Thousands of United States Dollars
	Effective Amounts Committed1	Contributions Received
CONTRIBUTED RESOURCES Australia Austria Belgium Brunei Darussalam Canada People’s Republic of China Denmark Finland France Germany Hong Kong, China Indonesia Ireland Italy Japan Republic of Korea Luxembourg Malaysia Nauru	1,803,702 $ 235,570 212,239 14,637 1,772,222 60,188 231,393 163,220 1,243,671 1,683,470 78,598 14,960 69,686 987,642 10,084,526 414,967 42,563 20,209 303	1,668,653 $ 287,361 245,188 14,534 1,809,080 60,188 283,128 164,854 1,375,192 1,955,413 78,598 14,960 65,322 928,962 18,444,800 349,384 48,763 18,614 303
Netherlands New Zealand Norway Portugal Singapore Spain Sweden Switzerland Taipei,China Thailand Turkey United Kingdom United States Total SET-ASIDE RESOURCES TRANSFERS FROM ORDINARY CAPITAL RESOURCES TRANSFERS FROM TECHNICAL ASSISTANCE SPECIAL FUND2	686,458 144,028 241,483 91,723 12,816 413,956 397,012 332,714 85,116 12,795 116,431 1,266,785 4,191,160 27,126,243	839,512 135,805 224,522 111,204 14,392 434,820 337,534 499,088 81,566 12,747 111,281 1,146,744 3,775,715
		35,538,227 73,172 1,220,000 3,619
TOTAL	27,126,243 $	36,835,018 $

1 At exchange rates per Resolutions.

2 Includes translation adjustments of $147 as of 31 December 2012.

The accompanying notes are an integral part of these special purpose financial statements (ADF-8).

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ASIAN DEVELOPMENT BANK—ASIAN DEVELOPMENT FUND NOTES TO SPECIAL PURPOSE FINANCIAL STATEMENTS 31 December 2012 and 2011

NOTE A—NATURE OF OPERATIONS

The Asian Development Bank (ADB), a multilateral development financial institution, was established in 1966 with its headquarters in Manila, Philippines. ADB and its operations are governed by the Agreement Establishing the Asian Development Bank (the Charter). Its purpose is to foster economic development and co-operation in Asia and the Pacific region and to contribute to the acceleration of the process of economic development of the developing member countries (DMCs) in the region, collectively and individually. Since 1999, ADB’s corporate vision and mission has been to help DMCs reduce poverty in the region. This was reaffirmed under the long-term strategic framework for 2008-2020 (Strategy 2020). Under Strategy 2020, ADB’s corporate vision continues to be “An Asia and Pacific Free of Poverty” and its mission has been to help its DMCs reduce poverty and improve living conditions and quality of life. ADB has been pursuing its mission and vision by focusing on three complementary strategic agendas: inclusive growth, environmentally sustainable growth, and regional integration. ADB provides financial and technical assistance for projects and programs, which will contribute to achieving this purpose. These are financed through ordinary capital resources (OCR) and Special Funds.[1]

The Asian Development Fund (ADF) was established in 1974 to more effectively carry out the special operations of the ADB by providing resources on concessional terms for economic and social development of the less developed member countries.

The resources of ADF have been augmented by nine replenishments, the most recent of which (ADF X and the fourth regularized replenishment of the Technical Assistance Special Fund [TASF]) was adopted by the Board of Governors in August 2008 and became effective on 16 June 2009 for the four-year period from January 2009. The replenishment provided substantial resources to the ADF to finance ADB’s concessional program, and to the TASF to finance technical assistance operations. Total replenishment size was SDR7,592,407,000, of which SDR2,665,765,000 was to come from new donor contributions. The donors agreed to allocate 3% of the total replenishment size (equivalent to 8% of total donor contributions) to TASF. As of 31 December 2012, ADB received instruments of contributions from 29 donors with a total amount equivalent to SDR2,578,687,000, including qualified contributions amounting to SDR516,125,000.

In July 2012, the Board of Governors adopted the resolution providing for the tenth replenishment of the Asian Development Fund (ADF XI) and the fifth regularized replenishment of the TASF. The resolution provides for a substantial replenishment of the ADF to finance ADB’s concessional program for the four-year period from January 2013, and for a replenishment of the TASF in conjunction with the ADF replenishment, to finance technical assistance operations under the fund. Total replenishment size is SDR7,927,174,000, of which SDR2,971,340,000 will come from new donor contributions. Donors agreed to allocate 3% of the total replenishment size (equivalent to 8% of total donor contributions) to TASF. The replenishment shall be effective upon receipt of the Instruments of Contribution for Unqualified Contribution commitments in an aggregate amount equivalent to at least SDR1,485,670,000, and such date should not be later than 1 July 2013.

ADB is immune from taxation pursuant to Chapter VIII, Article 56, Exemption from Taxation , of the Charter.

1 Asian Development Fund (ADF), Technical Assistance Special Fund (TASF), Japan Special Fund (JSF), ADB Institute (ADBI), Pakistan Earthquake Fund (PEF), Regional Cooperation and Integration Fund (RCIF), Climate Change Fund (CCF), and Asia Pacific Disaster Response Fund (APDRF).

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NOTE B—SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

In May 2001, the Board of Directors approved the adoption of the special purpose financial statements for ADF. The financial statements have been prepared for the specific purpose of reflecting the sources and applications of member contributions and are presented in US dollar equivalents at the reporting dates. With the adoption of the special purpose financial statements, loan loss provisioning, other than those for the debt relief loan write-off resulting from the implementation of the Heavily Indebted Poor Countries (HIPC) Debt Initiative discussed in Note D, has been eliminated. With the exception of the aforementioned, the ADF financial statements are prepared in accordance with accounting principles generally accepted in the United States of America (US GAAP).

In November 2005, the Board of Governors accepted a resolution to adopt a special drawing rights (SDR) currency management framework to facilitate resource administration and operational planning for the benefit of borrowers. The currency management framework was implemented on 1 January 2006 whereby ADB is authorized to convert ADF resources held in various currencies into one of the SDR basket of currencies (US dollar, euro, pound sterling, and yen), to value disbursements, repayments and loan charges in terms of SDR, and to determine the value of contributors’ paid-in contributions and all other resources of the ADF in terms of SDR, in case of withdrawal of a Contributor or termination of ADF.

In July 2007 ADB offered ADF borrowers the option to convert their existing liability (i.e., disbursed and outstanding loan balance) in various currencies into SDR, while the undisbursed portions would be treated as new loans. The conversion was made available beginning 1 January 2008, and as of 31 December 2012, 18 out of 28[2] ADF borrowing countries had opted to convert their loans, which were carried out on the nearest loan service payment dates at least one month from their concurrence.

Functional Currencies and Reporting Currency

The United States dollar (USD) is the reporting currency of the ADF for the purpose of presenting the financial position and the result of its operations.

With the implementation of the SDR currency management framework, ADF conducts its operations in SDRs and the SDR basket of currencies, which are US dollar, euro, pound sterling, and yen. The SDR and the SDR basket of currencies comprise the functional currencies of ADF.

Translation of Currencies

ADB adopts the use of daily exchange rates for accounting and financial reporting purposes. This allows transactions in currencies other than USD to be translated to the reporting currency using exchange rates applicable at the time of transactions. Assets and liabilities are translated using the applicable exchange rates at the end of each reporting period, except for Contributed Resources received in non-functional currencies. Translation adjustments relating to set-aside resources (Note H) are recorded as notional amounts receivable from or payable to OCR. Translation adjustments relating to revaluation of assets, liabilities, and fund balances denominated in ADF’s functional currencies and all investments classified as available for sale are reported as Accumulated Translation Adjustments in FUND BALANCES as part of Accumulated other comprehensive loss. Translation adjustments relating to other non-functional currencies are reported as NET UNREALIZED GAINS (LOSSES) in the Special Purpose Statement of Revenue and Expenses.

2 Thirty borrowers were eligible when the SDR conversion option for legacy ADF loans was offered in 2008. One borrower has paid off all its loans and another opted for the accelerated repayment of its legacy loans which reduced number of borrowing member countries to 28.

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Investments

Investment securities and negotiable certificates of deposit are classified as available for sale and are reported at fair value. Unrealized gains and losses are reported in FUND BALANCES as part of Accumulated other comprehensive loss. Realized gains and losses are measured by the difference between amortized cost and the net proceeds of sales.

Interest income on investment securities and time deposits is recognized as realized and reported, net of amortizations of premiums and discounts.

Securities Purchased Under Resale Arrangements

ADF accounts for transfers of financial assets in accordance with Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) 860, “Transfers and Servicing.” In general, transfers are accounted for as sales when control over the transferred assets has been relinquished. Otherwise the transfers are accounted for as resale agreements and collateralized financing arrangements. Under resale arrangements, securities purchased are recorded as assets and are not re-pledged.

Loans

Loan interest income is recognized on an accrual basis. It is the policy of ADF to place in non-accrual status loans made to eligible borrowing member countries if the principal or interest with respect to any such loans is overdue by six months. Interest on non-accruing loans is included in revenue only to the extent that payments have actually been received by ADF. ADB maintains a position of not taking part in debt rescheduling agreements with respect to sovereign loans. When ADB decides that a particular loan is no longer collectible, the entire amount is expensed during the period.

Contributed Resources

Contributions by donors are included in the special purpose financial statements as amounts committed and are reported in Contributed Resources as part of FUND BALANCES from the date Instruments of Contribution are deposited and related formalities are completed and made available for operational commitments.

Contributions are generally received in the currency of the contributor either in cash or notes.

Under ADF IX and X, contributors have the option to pay their contributions under the accelerated note encashment program and receive a discount. ADF invests the cash generated from this program and the investment income is used to finance operations. The related contributions are recorded at the full undiscounted amount, and the discount is amortized over the standard encashment period of 10 years and 9 years for ADF IX and ADF X, respectively.

Advanced Payments on Contributions

Payments received in advance or as qualified contributions that cannot be made available for operational commitment are recorded as advance payments and included under LIABILITIES.

Grants and Undisbursed Commitments

Grants are recognized in the special purpose financial statements when the grant is approved and becomes effective. Upon completion of a project or cancellation of a grant, any undisbursed amount is written back as a reduction in the grants for the year and the corresponding undisbursed commitment is eliminated accordingly.

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Fair Value of Financial Instruments

ASC 820 defines fair value as the price that would be received to sell an asset or paid to transfer a liability at measurement date in an orderly transaction among willing participants with an assumption that the transaction takes place in the entity’s principal market, or in the absence of principal market, in the most advantageous market for the asset or liability. The most advantageous market is the market where the sale of the asset or transfer of liability would maximize the amount received for the asset or minimize the amount paid to transfer the liability. The fair value measurement is not adjusted for transaction costs.

Fair Value Hierarchy

ASC 820 establishes a fair value hierarchy that gives the highest priority to quoted prices in active markets for identical assets or liabilities (Level 1), next priority to observable market inputs or market corroborated data (Level 2), and the lowest priority to unobservable inputs without market corroborated data (Level 3).

The fair values of ADB’s financial assets and liabilities are categorized as follows:

Level 1: fair values are based on unadjusted quoted prices for identical assets or liabilities in active markets. Level 2: fair values are based on quoted prices for similar assets or liabilities in active markets or markets that are not active; or valuation models for which significant inputs are obtained from market-based data that are observable.

Level 3: fair values are based on prices or valuation models for which significant inputs to the model are unobservable.

Inter-level transfers from one year to another may occur due to changes in market activities affecting the availability of quoted market prices or observable market data.

ADB’s policy is to recognize transfers in and transfers out of levels as of the end of the reporting period in which they occur.

Accounting Estimates

The preparation of special purpose financial statements requires management to make reasonable estimates and assumptions that affect the reported amounts of assets, liabilities, and fund balances as of the end of the year and the reported amounts of revenue and expenses during the year. The actual results could differ from those estimates. Judgments have been used in the valuation of certain financial instruments.

Accounting and Reporting Developments

In April 2011, the FASB issued Accounting Standards Update (ASU) 2011-03, “Transfers and Servicing (Topic 860) – Reconsideration of Effective Control for Repurchase Agreements.” The update removes from the assessment of effective control the criterion requiring the transferor to have the ability to repurchase or redeem the financial assets on substantially the agreed terms, even in the event of default by the transferee. It does not change the other criteria used in the assessment of effective control. The revised guidance is effective from quarter ended 31 March 2012 for ADB. This update did not have an impact on ADF’s special purpose financial statements.

In May 2011, the FASB issued ASU 2011-04, “Fair Value Measurement (Topic 820) – Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in US GAAP and IFRSs,” which provides consistency between US GAAP and International Financial Reporting Standards (IFRSs) on the definition of fair value (FV) and guidance on how to measure FV and related disclosure requirements. The ASU does not require additional FV measurements and is not intended to establish valuation standards or affect valuation practices outside of financial reporting. The new guidance is effective from quarter ended

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31 March 2012 for ADB. This update did not have an impact on ADF’s special purpose financial statements.

In June 2011, the FASB issued ASU 2011-05, “Comprehensive Income (Topic 220) – Presentation of Comprehensive Income,” which requires entities to present details of items that are reclassified from other comprehensive income to net income in the statement of comprehensive income. Subsequently, FASB issued ASU 2011-12 in December 2011 to effectively defer only those changes in ASU 2011-05 that relate to the presentation of reclassification adjustments out of accumulated other comprehensive income. ADB has decided to adopt the provisions in ASU 2011-05 and presented in ADF-2 and ADF-3 on ADF’s 31 December 2012 and 2011 special purpose financial statements the reclassification adjustments.

In December 2011, the FASB issued ASU 2011-11, “Balance Sheet (Topic 210) – Disclosures about Offsetting Assets and Liabilities”, to provide enhanced disclosures that will enable users of its financial statements to evaluate the effect or potential effect of netting arrangements on an entity’s financial position. An entity is required to apply the amendments for annual reporting periods beginning on or after 1 January 2013, and interim periods within those annual periods. ADB is currently assessing the impact of this update on ADF’s special purpose financial statements.

Special Purpose Statement of Cash Flows

For the purposes of the Special Purpose Statement of Cash Flows, ADF considers that its cash and cash equivalents are limited to DUE FROM BANKS, which consists of cash on hand and current accounts in banks used for (i) operational disbursements, (ii) receipt of funds from encashment of donor countries’ promissory notes, and (iii) clearing accounts.

NOTE C—INVESTMENTS

The main investment management objective is to maintain security and liquidity. Subject to these parameters, ADB seeks the highest possible return on its investments. Investments are governed by the Investment Authority approved by the Board of Directors in 2006.

ADB may engage in securities lending of government or government–guaranteed obligations for which ADB receives a guarantee from the securities custodian and a fee. Transfers of securities by ADB to counterparties are not accounted for as sales as the accounting criteria for the treatment of a sale have not been met. These securities must be available to meet ADB’s obligation to counterparties. Included in Investments as of 31 December 2012 were government or government-guaranteed obligations transferred under securities lending arrangements amounting to $58,541,000 ($11,700,000 – 2011).

The currency composition of the investment portfolio as of 31 December 2012 and 2011 expressed in United States dollars was as follows:

Currency United States dollar Euro Pound sterling Yen Brunei dollar Total	2012 2011 2,599,309,000 $ 2,711,240,000 $ 2,459,772,000 2,099,184,000 771,760,000 645,255,000 348,472,000 341,595,000 – 125,000 6,179,313,000 $ 5,797,399,000 $

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The estimated fair value and amortized cost of the investments as of 31 December 2012 and 2011 were as follows:

Due in one year or less Due after one year through five years Due after five years through ten years Total	Estimated Amortized Fair Value Cost 3,371,308,000 $ 3,358,215,000 $ 2,761,840,000 2,701,946,000 46,165,000 44,820,000 6,179,313,000 $ 6,104,981,000 $ 2012	2011
	Estimated Fair Value 3,371,308,000 $ 2,761,840,000 46,165,000 6,179,313,000 $	Estimated Amortized Fair Value Cost 3,408,919,000 $ 3,399,129,000 $ 2,371,229,000 2,296,573,000 17,251,000 15,663,000 5,797,399,000 $ 5,711,365,000 $

Additional information relating to investments in government or government-guaranteed obligations classified as available for sale is as follows:

		2012		2011
As of 31 December:
Amortized cost	$	4,592,336,000	$	4,038,649,000
Estimated fair value		4,666,668,000		4,124,683,000
Gross unrealized gains		74,510,000		86,607,000
Gross unrealized losses		(179,000)		(573,000)
For the years ended 31 December:
Change in net unrealized
gains (losses) from prior year		(11,703,000)		(15,365,000)
Proceeds from sales		23,600,000		197,793,000
Gross gain on sales		814,000		9,094,000

The rate of return on the average investments held during the year, including securities purchased under resale arrangement, based on the portfolio held at the beginning and end of each month, was 1.28% (1.71% – 2011) excluding unrealized gains and losses on investment securities, and 1.10% (1.46% – 2011) including unrealized gains and losses on investments.

As of 31 December 2012, gross unrealized losses resulting from market movements amounted to $179,000 ($573,000 – 2011) for government or government-guaranteed obligations. There was no security in 2012 (one – 2011) that sustained unrealized losses for over one year. Comparative details for 2012 and 2011 are as follows:

For the year 2012 Fair Value Government or government-guaranteed obligations 776,228,000 $ Oneyear	Oneyear	or less	Over one	year	Total
	Fair Value	Unrealized Losses	Fair Value	Unrealized Losses	Fair Unrealized Value Losses 776,228,000 $ 179,000 $
		179,000 $	– $	– $
For the year 2011 Fair Value Government or government-guaranteed obligations 370,738,000 $ Oneyear	Oneyear	or less	Over one	year	Total
	Fair Value	Unrealized Losses	Fair Value	Unrealized Losses	Fair Unrealized Value Losses 590,787,000 $ 573,000 $
		541,000 $	220,049,000 $	32,000 $

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Fair Value Disclosure

The fair value of investments as of 31 December 2012 and 2011 was as follows:

Assets Investments Government or government- guaranteed obligations Time deposits Securities purchased under resale arrangement Total assets at fair value	31 December 2012 4,666,668,000 $ 1,512,645,000 340,177,000 6,519,490,000 $	Fair Value Measurements	Fair Value Measurements
		Level 1 4,043,962,000 $ – – 4,043,962,000 $	Level 2 Level 3 622,706,000 $ – $ 1,512,645,000 – 340,177,000 – 2,475,528,000 $ – $
Assets Investments Government or government- guaranteed obligations Time deposits Securities purchased under resale arrangement Total assets at fair value	31 December 2011 4,124,683,000 $ 1,672,716,000 335,818,000 6,133,217,000 $	Fair Value Measurements
		Level 1 3,365,358,000 $ – – 3,365,358,000 $	Level 2 Level 3 759,325,000 $ – $ 1,672,716,000 – 335,818,000 – 2,767,859,000 $ – $

If available, investment securities are fair valued based on active market quotes. These include most government/government-backed obligations. For investments where active market quotes are not available, the valuation is based on discounted cash flow models using market observable inputs, such as interest rates, foreign exchange rates, basis spreads, cross currency rates, and volatilities. Time deposits are reported at cost, which approximates fair value.

ADB maintains documented process and internal controls to value the investment securities. The data management unit in treasury department is responsible for providing the valuation in accordance with the business process.

The table below provides the details of transfers between Level 1 and Level 2 for the years ended 31 December 2012 and 2011:

Investments	2012 Level 1 Level 2	2012 Level 1 Level 2	2011
	Level 1		Level 1 Level 2
Government or government- guaranteed obligations Transfers (out of) into Transfers into(out of)	(131,455,000) $ 48,971,000	131,455,000 $ (48,971,000)	(98,317,000) $ 98,317,000 $ – –

The inter-level transfers are attributed to the availability of market quotes.

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There were no assets measured at fair value on a recurring basis using significant unobservable inputs (Level 3) as of 31 December 2012. As of 31 December 2011, the movement of assets measured at fair value which are categorized under Level 3 was as follows:

Balance, 1 January 2011 Total gains (losses) - realized/unrealized Included in earningsa Included in other comprehensive income (ADF-3) Currency translation adjustments Unrealized investment holding losses Maturities	Government or government- guaranteed obligations 468,043,000 $ 130,000 7,018,000 (122,000) (212,311,000)
Transfers out of Level 3	(262,758,000)
Balance, 31 December 2011 The amount of total losses for the period recognized in other comprehensive income attributable to the change in net unrealized gains or losses relating to assets still held at the reporting date. aIncluded in income from Investments (ADF-2).	– $ – $

Transfers out of level 3 in 2011 were primarily the result of refining ADB’s valuation approach. All investment securities, including those under level 3, are of high credit quality. The government or government-guaranteed obligations are largely floating rate notes and callable bonds with a credit quality rating from Standard and Poor’s of AAA to AA–.

NOTE D—LOANS AND HIPC DEBT INITIATIVE

Prior to 1 January 1999, loans of ADF were extended to eligible borrowing member countries, bore a service charge of 1% and required repayment over periods ranging from 35 to 40 years. On 14 December 1998, the Board of Directors approved an amendment to ADF loan terms, as follows: (i) for loans to finance specific projects, the maturity was shortened to 32 years including an 8-year grace period; (ii) for program loans to support sector development, the maturity was shortened to 24 years including an 8-year grace period; and (iii) all new loans bear a 1% interest charge during the grace period, and 1.5% during the amortization period, with equal amortization. The revised ADF lending terms took effect on 1 January 1999 for loans for which formal loan negotiations were completed on or after 1 January 1999. ADF requires borrowers to absorb exchange risks attributable to fluctuations in the value of the currencies disbursed.

In September 2007, the Board of Directors approved a new hard-term ADF lending facility. The facility will have a fixed interest rate of 150 basis points below the weighted average of the ten-year fixed swap rates of the special drawing rights component currencies plus the OCR lending spread, or the current ADF rate, whichever is higher. Other terms are similar to those of regular ADF loans. The interest rate will be reset every January and will apply to all hard-term loans approved that year and will be fixed for the life of the loan. For hard-term ADF loans approved in 2012, the interest rate was set at 1.0% during grace period and 1.5% thereafter (2.02% – 2011). Two loans were approved under this facility in 2012 (three – 2011).

In April 2008, the Board of Governors adopted the resolution on Providing Heavily Indebted Poor Countries (HIPC) Relief from Asian Development Fund Debt which allowed ADB to participate in the HIPC Debt

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Initiative. Subsequently, the Board of Directors approved the provision of debt relief under HIPC to Afghanistan.

ADB believes that because there is no comparable market for ADF loans and because they do not intend to sell these loans, using market data to calculate the fair value of the loans is not meaningful. As such, the fair value of loans is determined based on the terms at which a similar loan would currently be made by ADB to a similar borrower. For such loans, fair value approximates the carrying amount. The estimated fair value of loans is not affected by credit risks because the amount of any such adjustment is considered not to have a material effect based on ADB’s experience with its borrowers.

Undisbursed loan commitments and an analysis of loans by country as of 31 December 2012 are shown in ADF-6.

As of 31 December 2012 and 2011, loans to borrowers that exceeded 5% of total loans were as follows:

Pakistan Bangladesh Viet Nam Sri Lanka Nepal Others (individually less than 5% of total loans) Total Outstanding Loans Allowance for HIPC Debt Relief Net Outstanding Loans	2012 2011 6,396,848,000 $ 6,994,680,000 $ 6,096,698,000 5,974,595,000 3,775,048,000 3,651,183,000 2,621,663,000 2,659,314,000 1,552,998,000 1,588,004,000 8,721,743,000 8,646,831,000 29,164,998,000 29,514,607,000 (77,937,000) (78,927,000) 29,087,061,000 $ 29,435,680,000 $

As of 31 December 2012, there were 28 loans to Myanmar in non-accrual status representing 2.0% of the total outstanding loans (28 loans to Myanmar – 2011). The total principal amount outstanding of such loans was $590,813,000 ($642,287,000 – 2011) of which $401,310,000 ($398,911,000 – 2011) was overdue. Loans in non-accrual status resulted in $6,249,000 ($6,280,000 – 2011) not being recognized as income from loans for the year ended 31 December 2012. The accumulated interest on these loans that was not recognized as income as of 31 December 2012 totaled $90,210,000 ($91,644,000 – 2011).

Credit Quality of Loans

ADF loans are provided for the economic and social development of the less developed member countries, which generally have lower credit quality than OCR borrowers. ADB uses a performance based allocation (PBA) system to allocate ADF resources among the many competing needs in the region and to direct the funds to where they will be used most effectively. ADB regularly reviews the borrowers’ debt sustaining capacity in determining the proportion of grant and loan that would be provided to each borrower.

The credit quality of ADF loans has been classified by mapping the external sovereign ratings of the borrowers to ADB’s internal risk rating scale used for OCR loans.

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The credit quality of ADF loans was as follows:

Risk Class Low credit risk Medium credit risk High credit risk Total	Risk Rating 1–5 (AAA to BBB–) 6–11 (BB+ to B–) 12–14 (CCC+ to D)	2012 2011 1,370,807,000 $ 54,109,000 $ 16,304,670,000 24,238,827,000 11,489,521,000 5,221,671,000 29,164,998,000 $ 29,514,607,000 $

Provision for HIPC Debt Relief amounting to $82,350,000 relating to the Afghanistan debt relief under the HIPC Debt Initiative was recognized and charged to income in 2008. Of this amount, a total of $4,413,000 was written-off as the loan service payments of affected loans fell due. This brought the balance of Allowance for HIPC debt relief as of 31 December 2012 to $77,937,000.

NOTE E—RELATED PARTY TRANSACTIONS

The OCR and special funds resources are at all times used, committed, and invested entirely separate from each other. Included in Other Assets as of 31 December 2012 is $227,000 ($1,227,000 – 2011) receivable of ADF from agency trust funds resulting from administrative arrangements and operating activities.

Payable to related funds of $37,894,000 ($41,432,000 – 2011) is an amount due to OCR, representing the unpaid balance of ADF’s share in the administrative and operational expenses of ADB. The allocation of expenses is based on operational activities and are settled regularly. See Note G.

Under ADF X and the fourth regularized replenishment of TASF, a specific portion of the total contributions is to be allocated to TASF. ADF receives contributions from members and subsequently transfers the specified portion to TASF. As of 31 December 2012, ADF has transferred all allocated contributions to TASF.

NOTE F—CONTRIBUTED RESOURCES AND ADVANCED CONTRIBUTIONS

In May 2012, the Board of Governors approved the allocation of $120,000,000 from OCR’s 2011 net income to ADF.

ADF receives cash or nonnegotiable, noninterest-bearing demand obligations as payment for the contributions. Subject to certain restrictions imposed by applicable Board of Governors’ resolutions, demand obligations are encashable by ADB at par upon demand. The unencashed balance as of 31 December 2012 is reported as a reduction in the Fund Balances, which ADB currently expects will be encashed in varying amounts over the standard encashment period ending 31 December 2014 for ADF IX and 31 December 2017 for ADF X.

As of 31 December 2012, contributions from 30 donors totaling $3,979,851,000 (29 donors totaling $4,139,089,000 – 2011) were committed for ADF X. Of these, $3,714,381,000 ($2,849,194,000 – 2011), including amortized discount of $12,317,000 ($6,788,000 – 2011) were received and recorded in Contributed Resources.

Advance contributions received from donors outstanding as of 31 December 2012 total $207,250,000 ($220,848,000 – 2011). Of this, contributions totaling $161,935,000 ($163,605,000 – 2011) were received in demand obligations, and are included in Other Assets. The remaining $45,315,000 ($57,243,000 – 2011) was received in cash.

In 2012, ADB received Luxembourg’s contribution to the Tenth Replenishment of the Asian Development Fund (ADF XI) and the Fifth Regularized Replenishment of the Technical Assistance Special Fund

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amounting to €8,400,000 ($11,102,000 equivalent at 31 December 2012 exchange rate). This is temporarily reported in Advance payments on contributions pending effectivity of the replenishment.

NOTE G—ADMINISTRATIVE EXPENSES

Administrative expenses represent administration charges from OCR which is an apportionment of all administrative expenses of ADB (other than those pertaining directly to ordinary operations and special operations), in the proportion of the relative volume of operational activities.

NOTE H—SET-ASIDE RESOURCES

Pursuant to the provisions of Article 19, paragraph 1(i) of the Charter, the Board of Governors has authorized the setting aside of 10% of the unimpaired “paid-in” capital paid by member countries pursuant to Article 6, paragraph 2(a) of the Charter and of the convertible currency portion paid by member countries pursuant to Article 6, paragraph 2(b) of the Charter as of 28 April 1973, to be used as a part of the Special Funds of ADB. The capital so set aside was allocated and transferred from the OCR to ADF as Set-Aside Resources.

The capital stock of ADB is defined in Article 4, paragraph 1 of the Charter, “in terms of United States dollars of the weight and fineness in effect on 31 January 1966” (the 1966 dollar). Therefore, Set-Aside Resources had historically been translated into the current United States dollar (ADB’s unit of account), on the basis of its par value in terms of gold. From 1973 until 31 March 1978, the rate arrived at on this basis was $1.20635 per 1966 dollar. Since 1 April 1978, at which time the Second Amendment to the Articles of Agreement of the International Monetary Fund (IMF) came into effect, currencies no longer had par values in terms of gold.

Pending ADB’s selection of the appropriate successor to the 1966 dollar, the Set-Aside Resources have been valued for purposes of the accompanying financial statements in terms of the SDR, at the value in current United States dollars as denominated by the IMF. As of 31 December 2012, the value of the SDR in terms of the current United States dollar was $1.53692 ($1.53527 – 2011). On this basis, Set-Aside Resources amounted to $73,172,000 ($73,094,000 – 2011). If the capital stock of ADB as of 31 December 2012 had been valued in terms of $12,063.50 per share, Set-Aside Resources would have been $57,434,000.

NOTE I—COMPREHENSIVE INCOME (LOSS)

Comprehensive Income (Loss) has two major components: revenue less than expenses (ADF-2) and other comprehensive income (loss) (ADF-3). Other Comprehensive Income (Loss) includes unrealized gains and losses on “Available for Sale” securities and translation adjustments of assets and liabilities denominated in one of the functional currencies.

The changes in Accumulated Other Comprehensive Loss balances for the years ended 31 December 2012 and 2011 expressed in thousands of US dollars were as follows:

Balance, 1 January Changes from period activity Balance, 31 December	2012 2011 (3,898,954) $ (3,211,402) $ 1,279,254 (687,552) (2,619,700) $ (3,898,954) $ Accumulated Translation Adjustments	2012 2011 86,034 $ 101,399 $ (11,703) (15,365) 74,331 $ 86,034 $ Unrealized Investment Holding Gains	Accumulated Other Comprehensive Loss
	2012	2012	2012 2011 (3,812,920) $ (3,110,003) $ 1,267,551 (702,917) (2,545,369) $ (3,812,920) $
	(3,898,954) $ 1,279,254	86,034 $ (11,703)
	(2,619,700) $	74,331 $

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ADF-8

continued

NOTE J—GRANTS AND UNDISBURSED COMMITMENTS

ADF IX introduced financing in the form of grants for the first time. During 2012, 23 grants (16 – 2011) totaling $693,030,000 ($596,760,000 – 2011) were approved, while $383,647,000 ($1,120,579,000 – 2011), net of $35,533,000 ($3,611,000 – 2011) write back of undisbursed commitments for financially closed and/or cancelled grants, became effective.

The fair value of undisbursed commitments approximates the amount outstanding, because ADB expects that disbursements will substantially be made for all the projects/programs covered by the commitments.

NOTE K—OTHER FAIR VALUE DISCLOSURES

As of 31 December 2012 and 2011, ADF has no assets or liabilities measured at fair value on a nonrecurring basis. See Notes C, D, and J for discussions relating to investments, loans, and undisbursed commitments, respectively. In all other cases, the carrying amounts of ADF’s assets and liabilities are considered to approximate fair values.

NOTE L—SUBSEQUENT EVENTS

ADB has evaluated subsequent events after 31 December 2012 through 8 March 2013, the date these Special Purpose Financial Statements are available for issuance. On 17 January 2013, Myanmar has cleared all the arrears due on its loans. See Note D.

125

TECHNICAL ASSISTANCE SPECIAL FUND MANAGEMENT’S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING

The management of Asian Development Bank (“ADB”) is responsible for establishing and maintaining adequate internal control over financial reporting. ADB’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles in the United States of America.

ADB’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of ADB; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles in the United States of America, and that receipts and expenditures of ADB are being made only in accordance with authorizations of management and directors of ADB; and (iii) provide reasonable assurance regarding prevention or timely detection and correction of unauthorized acquisition, use, or disposition of ADB’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 misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

ADB’s management assessed the effectiveness of ADB’s internal control over financial reporting as of 31 December 2012. In making this assessment, ADB’s management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission in Internal Control – Integrated Framework. Based on that assessment, management believes that as of 31 December 2012, ADB’s internal control over financial reporting is effective based upon the criteria established in Internal Control – Integrated Framework.

Haruhiko Kuroda President Thierry de Longuemar Vice-President (Finance and Risk Management)

Simon T. Bradbury Controller

8 March 2013

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Deloitte & Touche LLP Certified Public Accountants Unique Entity No. T08LL0721A 6 Shenton Way, Tower Two #32-00 Singapore 068809

Tel: +65 6224 8288 Fax: +65 6538 6166 www.deloitte.com

INDEPENDENT AUDITORS’ REPORT

To the Board of Directors and the Board of Governors of Asian Development Bank

We have audited management's assertion, included in the accompanying Management’s Report on Internal Control over Financial Reporting, that Asian Development Bank ("ADB") maintained effective internal control over financial reporting as of December 31, 2012, based on the criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. ADB's management is responsible for maintaining effective internal control over financial reporting and for its assertion of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on management's assertion based on our audit.

We conducted our audit in accordance with attestation standards established by the American Institute of Certified Public Accountants. 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. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

ADB’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with accounting principles generally accepted in the United States of America. ADB'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 ADB; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with accounting principles generally accepted in the United States of America, and that receipts and expenditures of ADB are being made only in accordance with authorizations of management and directors of ADB; and (3) provide reasonable assurance regarding prevention or timely detection and correction of unauthorized acquisition, use, or disposition of ADB’s assets that could have a material effect on the financial statements.

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Because of the inherent limitations of internal control over financial reporting, including the possibility of collusion or improper management override of controls, material misstatements due to error or fraud may not be prevented or detected and corrected on a timely basis. Also, projections of any evaluation of the effectiveness of the internal control over financial reporting to future periods are subject to the risk that the controls may become inadequate because of changes in conditions or that the degree of compliance with the policies or procedures may deteriorate.

In our opinion, management’s assertion that ADB maintained effective internal control over financial reporting as of December 31, 2012, is fairly stated, in all material respects, based on the criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission.

We have also audited, in accordance with auditing standards generally accepted in the United States of America, the accompanying statement of financial position of Asian Development Bank (“ADB”) – Technical Assistance Special Fund as of December 31, 2012 and 2011 and the related statements of activities and changes in net assets, and cash flows for the years then ended and the related notes to the financial statements. Our report dated March 8, 2013 expressed an unqualified opinion on those financial statements.

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Public Accountants and Certified Public Accountants

Singapore March 8, 2013

128

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Deloitte & Touche LLP Certified Public Accountants Unique Entity No. T08LL0721A 6 Shenton Way, Tower Two #32-00 Singapore 068809

Tel: +65 6224 8288 Fax: +65 6538 6166 www.deloitte.com

INDEPENDENT AUDITORS’ REPORT

To the Board of Directors and the Board of Governors of Asian Development Bank

We have audited the accompanying financial statements of Asian Development Bank (“ADB”) – Technical Assistance Special Fund which comprise the statement of financial position as of December 31, 2012 and 2011, and the related statements of activities and changes in net assets, and cash flows for the years then ended, 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 accounting principles generally accepted in the United States of America; 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.

An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditor’s 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.

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Opinion

In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of ADB - Technical Assistance Special Fund as of December 31, 2012 and 2011, and the results of its operations and its cash flows for the years then ended in accordance with accounting principles generally accepted in the United States of America.

Report on Management’s Assertion on Internal Control over Financial Reporting

We have also audited, in accordance with attestation standards established by the American Institute of Certified Public Accountants, management’s assertion that ADB maintained effective internal control over financial reporting as of December 31, 2012, based on the criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated March 8, 2013 expressed an unqualified opinion on management’s assertion that ADB maintained effective internal control over financial reporting.

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Public Accountants and Certified Public Accountants

Singapore March 8, 2013

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TASF-1

ASIAN DEVELOPMENT BANK—TECHNICAL ASSISTANCE SPECIAL FUND STATEMENT OF FINANCIAL POSITION

31 December 2012 and 2011

Expressed in Thousands of United States Dollars

ASSETS DUE FROM BANKS INVESTMENTS (Notes C and G) Time deposits SECURITIES PURCHASED UNDER RESALE ARRANGEMENTS (Note C) ACCRUED REVENUE DUE FROM CONTRIBUTORS (Note F) ADVANCES FOR GRANTS AND OTHER ASSETS (Note D)	2012 5,372 $ 376,656 40,017 36 40,068 6,332	2011
		1,494 $ 380,995 10,923 21 129,083 9,464
TOTAL	468,481 $	531,980 $
LIABILITIES AND UNCOMMITTED BALANCES ACCOUNTS PAYABLE AND OTHER LIABILITIES (Note D) 208 $ UNDISBURSED COMMITMENTS (Notes E and G) 327,107 TOTAL LIABILITIES 327,315 UNCOMMITTED BALANCES (TASF-2 and TASF-4) (Note F), represented by: Unrestricted net assets 141,166		188 $ 306,681
		306,869 225,111
TOTAL 468,481 $		531,980 $

The accompanying notes are an integral part of these financial statements (TASF-6).

131

TASF-2

ASIAN DEVELOPMENT BANK—TECHNICAL ASSISTANCE SPECIAL FUND STATEMENT OF ACTIVITIES AND CHANGES IN NET ASSETS For the Years Ended 31 December 2012 and 2011

Expressed in Thousands of United States Dollars

CHANGES IN UNRESTRICTED NET ASSETS CONTRIBUTIONS (TASF-4) (Note F) REVENUE From investments (Note C) From other sources—net Total EXPENSES Technical assistance—net (TASF-5) (Note E) Financial expenses Total CONTRIBUTIONS AND REVENUE LESS THAN EXPENSES EXCHANGE (LOSSES) GAINS—net DECREASE IN NET ASSETS NET ASSETS AT BEGINNING OF YEAR	2012 44,323 $ 2,977 310 47,610 128,290 19 128,309 (80,699) (3,246) (83,945) 225,111	2011
		81,733 $ 3,340 14
		85,087
		111,938 21
		111,959
		(26,872) 3,897
		(22,975) 248,086
NET ASSETS AT END OF YEAR	141,166 $	225,111 $

The accompanying notes are an integral part of these financial statements (TASF-6).

132

TASF-3

ASIAN DEVELOPMENT BANK—TECHNICAL ASSISTANCE SPECIAL FUND STATEMENT OF CASH FLOWS For the Years Ended 31 December 2012 and 2011

Expressed in Thousands of United States Dollars

CASH FLOWS FROM OPERATING ACTIVITIES Contributions received Interest on investments received Net cash received from other activities Technical assistance disbursed Financial expenses paid Net Cash Provided by Operating Activities CASH FLOWS FROM INVESTING ACTIVITIES Maturities of investments Purchases of investments Receipts from securities purchased under resale arrangements Payments for securities purchased under resale arrangements Net Cash Used in Investing Activities Effect of Exchange Rate Changes on Due from Banks Net Increase (Decrease) in Due from Banks Due from Banks at Beginning of Year Due from Banks at End of Year RECONCILIATION OF DECREASE IN NET ASSETS TO NET CASH PROVIDED BY OPERATING ACTIVITIES: Decrease in net assets (TASF-2) Adjustments to reconcile decrease in net assets to net cash provided by operating activities: Change in accrued revenue Change in due from contributors Change in other assets Change in miscellaneous liabilities Change in undisbursed commitments Exchange losses—net Net Cash Provided by Operating Activities	2012 132,439 $ 2,961 310 (104,652) (19) 31,039 20,034,760 (20,028,951) 4,741,843 (4,775,155) (27,503) 342 3,878 1,494 5,372 $ (83,945) $ (16) 78,017 3,072 28 20,426 13,457 31,039 $	2011
		131,020 $ 3,422 14 (102,563) (21)
		31,872
		12,249,980 (12,275,756) 2,676,996 (2,683,334)
		(32,114)
		96
		(146) 1,640
		1,494 $
		(22,975) $ 82 35,414 2,408 65 8,086 8,792
		31,872 $

The accompanying notes are an integral part of these financial statements (TASF-6).

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TASF-4

ASIAN DEVELOPMENT BANK—TECHNICAL ASSISTANCE SPECIAL FUND STATEMENT OF RESOURCES 31 December 2012

Expressed in Thousands of United States Dollars

Contributor	Contributions Committed During 2012	Direct Voluntary Regularized Contributions Replenishment1	Direct Voluntary Regularized Contributions Replenishment1	Total Contributions
Australia Austria Bangladesh Belgium Brunei Darussalam Canada People’s Republic of China Denmark Finland France Germany Hong Kong, China India Indonesia Ireland Italy Japan Republic of Korea Luxembourg Malaysia Nauru Netherlands New Zealand Norway Pakistan Portugal Singapore Spain Sri Lanka Sweden Switzerland Taipei,China Thailand Turkey United Kingdom United States Total Transfer to Asian Development Fund Allocation from OCR Net Income Other Resources2	– $ – – – – – – – – – – – 196 – – 4,057 – – – – – – – – 70 – – – – – – – – – – – 4,323 40,000	2,484 $ 159 47 1,394 – 3,346 1,600 1,963 237 1,697 3,315 100 4,144 250 – 774 47,710 1,900 – 909 – 1,338 1,096 3,279 1,946 – 1,100 190 6 862 1,035 200 – – 5,617 1,500 90,198	53,414 $ 7,177 – 5,875 450 43,311 4,812 5,750 4,744 33,862 44,509 3,509 – 40 3,643 22,342 287,286 20,516 609 818 67 20,484 4,828 7,896 – 3,595 711 16,564 – 11,931 9,314 3,455 493 3,237 39,447 102,120 766,808	55,898 $ 7,336 47 7,269 450 46,657 6,412 7,713 4,981 35,559 47,824 3,609 4,144 290 3,643 23,116 334,996 22,416 609 1,727 67 21,822 5,923 11,175 1,946 3,595 1,811 16,754 6 12,793 10,349 3,655 493 3,237 45,064 103,620
				857,006 (3,472) 849,000 189,875
TOTAL	44,323 $			1,892,409 $

Note: Numbers may not sum precisely because of rounding.

1 Represents TASF portion of contributions to the replenishment of the Asian Development Fund and the Technical Assistance Special Fund authorized by Governors' Resolution Nos. 182, 214, 300 and 333 at historical values.

2 Represents income, repayments, and reimbursements accruing to TASF since 1980.

The accompanying notes are an integral part of these financial statements (TASF-6).

134

TASF-5

ASIAN DEVELOPMENT BANK—TECHNICAL ASSISTANCE SPECIAL FUND SUMMARY STATEMENT OF TECHNICAL ASSISTANCE APPROVED AND EFFECTIVE For the Year Ended 31 December 2012

Expressed in Thousands of United States Dollars

Recipient	Project Preparation	Advisory	Research and Development	Policy and Advisory	Capacity Development	Total
Afghanistan Armenia Azerbaijan Bangladesh Bhutan Cambodia People’s Republic of China Cook Islands Fiji Georgia India Indonesia Kazakhstan Kiribati Kyrgyz Republic Lao People’s Democratic Republic Malaysia Marshall Islands Federated States of Micronesia Mongolia Myanmar Nepal Pakistan Papua New Guinea Philippines Republic of the Maldives Samoa Solomon Islands Sri Lanka Tajikistan Thailand Timor-Leste Tonga Tuvalu Uzbekistan Vanuatu Viet Nam Regional Total Regional Activities	225 $ 700 1,096 2,903 (87) 1,401 12,347 – – (162) 493 1,500 225 – 1,000 775 – – – 92 – 225 233 (43) 3,685 (195) 600 750 1,250 1,250 – 300 (137) – 4,873 (133) 3,349 2,850	(421) $ – – – (158) (98) (1,159) – – – (1,418) 79 – – – 92 – – – – – (7) – – (238) – – (141) – – – – – (7) – – (117) –	– $ – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – 11,733	– $ – – – – – 11,578 – – 170 816 – – – – (52) – 500 – 750 565 – – 1,000 630 – – – – – 335 – – – 2,250 – – 12,173	1,500 $ 600 – 1,861 289 1,199 2,538 500 500 150 3,781 – – 800 540 1,352 300 225 225 95 1,000 2,825 – 1,000 1,500 1,350 – 600 342 – – 1,200 675 390 82 500 2,537 20,491	1,304 $ 1,300 1,096 4,765 44 2,501 25,304 500 500 158 3,671 1,579 225 800 1,540 2,168 300 725 225 937 1,565 3,044 233 1,957 5,577 1,155 600 1,209 1,592 1,250 335 1,500 538 383 7,204 367 5,768 47,247
	41,365 $	(3,592) $	11,733 $	30,716 $	50,947 $	131,169 (2,879)
TOTAL						128,290 $

Notes:

(i) Numbers may not sum precisely because of rounding.

(ii) Negative amounts represent net undisbursed commitments written back to balances available for future commitments (Notes B and E). The accompanying notes are an integral part of these financial statements (TASF-6).

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TASF-6

ASIAN DEVELOPMENT BANK—TECHNICAL ASSISTANCE SPECIAL FUND NOTES TO FINANCIAL STATEMENTS 31 December 2012 and 2011

NOTE A—NATURE OF OPERATIONS

The Asian Development Bank (ADB), a multilateral development financial institution, was established in 1966 with its headquarters in Manila, Philippines. ADB and its operations are governed by the Agreement Establishing the Asian Development Bank (the Charter). Its purpose is to foster economic development and co-operation in Asia and the Pacific region and to contribute to the acceleration of the process of economic development of the developing member countries (DMCs) in the region, collectively and individually. Since 1999, ADB’s corporate vision and mission has been to help DMCs reduce poverty in the region. This was reaffirmed under the long-term strategic framework for 2008-2020 (Strategy 2020). Under Strategy 2020, ADB’s corporate vision continues to be “An Asia and Pacific Free of Poverty” and its mission has been to help its DMCs reduce poverty and improve living conditions and quality of life. ADB has been pursuing its mission and vision by focusing on three complementary strategic agendas: inclusive growth, environmentally sustainable growth, and regional integration. ADB provides financial and technical assistance for projects and programs, which will contribute to achieving this purpose. These are financed through ordinary capital resources (OCR) and Special Funds.[1]

The TASF was established to provide technical assistance on a grant basis to DMCs of the ADB and for regional technical assistance. TASF resources consist of regularized replenishments and direct voluntary contributions by members, allocations from the net income of OCR, and revenue from investments and other sources.

In August 2008, the Board of Governors adopted the resolution providing for the ninth replenishment of the Asian Development Fund (ADF X) and the fourth regularized replenishment of the TASF. In conjunction with the ADF replenishment, the resolution provides for a replenishment of the TASF to finance technical assistance operations under the fund. Total replenishment size was SDR7,490,301,000, of which SDR2,665,765,000 was to come from new donor contributions. Donors agreed to allocate 3% of the total replenishment size (equivalent to 8% of total donor contributions) to TASF. The replenishment became effective on 16 June 2009. As of 31 December 2012, ADB received instruments of contributions from 29 donors with a total amount equivalent to SDR2,578,687,000, including qualified contributions amounting to about SDR516,125,000.

In July 2012, the Board of Governors adopted the resolution providing for the tenth replenishment of the Asian Development Fund (ADF XI) and the fifth regularized replenishment of the TASF. The resolution provides for a substantial replenishment of the ADF to finance ADB’s concessional program for the four-year period from January 2013, and for a replenishment of the TASF in conjunction with the ADF replenishment, to finance technical assistance operations under the fund. Total replenishment size is SDR7,927,174,000, of which SDR2,971,340,000 will come from new donor contributions. Donors agreed to allocate 3% of the total replenishment size (equivalent to 8% of total donor contributions) to TASF. The replenishment shall be effective upon receipt of the Instruments of Contribution for Unqualified Contribution commitments in an aggregate amount equivalent to at least SDR1,485,670,000, and such date should not be later than 1 July 2013.

ADB is immune from taxation pursuant to Chapter VIII, Article 56, Exemption from Taxation , of the Charter.

1 Asian Development Fund (ADF), Technical Assistance Special Fund (TASF), Japan Special Fund (JSF), ADB Institute (ADBI), Pakistan Earthquake Fund (PEF), Regional Cooperation and Integration Fund (RCIF), Climate Change Fund (CCF), and Asia Pacific Disaster Response Fund (APDRF).

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TASF-6

continued

NOTE B—SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Presentation of the Financial Statements

The financial statements of the TASF are prepared in accordance with accounting principles generally accepted in the United States of America (US GAAP), and are presented on the basis of those for not-forprofit organizations.

TASF reports donors’ contributions of cash and other assets as unrestricted assets as these are made available to TASF without conditions other than for the purpose of pursuing its objectives.

Functional and Reporting Currency

The United States dollar is the functional and reporting currency, representing the currency of the primary economic operating environment of TASF.

Translation of Currencies

ADB adopts the use of daily exchange rates for accounting and financial reporting purposes. This allows transactions denominated in non-US dollar currencies to be translated to the reporting currency using exchange rates applicable at the time of transactions. Contributions included in the financial statements during the year are recognized at applicable exchange rates as of the respective dates of commitment. At the end of each accounting month, translations of assets, liabilities, and uncommitted balances which are denominated in non-US dollar currencies are adjusted using the applicable rates of exchange at the end of the reporting period. These translation adjustments are accounted for as exchange gains or losses and are credited or charged to operations.

Investments

All investment securities held by TASF are reported at fair value. Realized and unrealized gains and losses are included in Revenue from investments.

Interest income on time deposits is recognized as realized and reported in Revenue from investments.

Securities Purchased Under Resale Arrangements

TASF accounts for the transfer of financial assets in accordance with Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) 860, “Transfers and Servicing.” In general, transfers are accounted for as sales under ASC 860 when control over the transferred assets has been relinquished. Otherwise, the transfers are accounted for as resale arrangements and collateralized financing arrangements. Securities purchased under resale arrangements are recorded as assets and are not repledged.

Contributions

The contributions from donors and the allocations from OCR net income are included in the financial statements from the date of effectivity of the contribution agreement, and the Board of Governors’ approval, respectively.

Technical Assistance and Undisbursed Commitments

Technical assistance (TA) and grants are recognized in the financial statements when the project is approved and becomes effective. Upon completion or cancellation of a TA project, any undisbursed amount is written back as a reduction in technical assistance for the year and the corresponding undisbursed commitment is eliminated accordingly.

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TASF-6

continued

Advances are provided from TA and grants to the executing agency or co-operating institution, for the purpose of making payments for eligible expenses. The advances are subject to liquidation and charged against undisbursed commitments. Any unutilized portion is required to be returned to the fund. These are included in ADVANCES FOR GRANTS AND OTHER ASSETS.

Fair Value of Financial Instruments

ASC 820 defines fair value as the price that would be received to sell an asset or paid to transfer a liability at measurement date in an orderly transaction among willing participants with an assumption that the transaction takes place in the entity’s principal market, or in the absence of principal market, in the most advantageous market for the asset or liability. The most advantageous market is the market where the sale of the asset or transfer of liability would maximize the amount received for the asset or minimize the amount paid to transfer the liability. The fair value measurement is not adjusted for transaction costs.

Fair Value Hierarchy

ASC 820 establishes a fair value hierarchy that gives the highest priority to quoted prices in active markets for identical assets or liabilities (Level 1), next priority to observable market inputs or market corroborated data (Level 2), and the lowest priority to unobservable inputs without market corroborated data (Level 3).

The fair values of ADB’s financial assets and liabilities are categorized as follows:

Level 1: fair values are based on unadjusted quoted prices for identical assets or liabilities in active markets. Level 2: fair values are based on quoted prices for similar assets or liabilities in active markets or markets that are not active; or valuation models for which significant inputs are obtained from market-based data that are observable.

Level 3: fair values are based on prices or valuation models for which significant inputs to the model are unobservable.

Inter-level transfers from one year to another may occur due to changes in market activities affecting the availability of quoted market prices or observable market data.

ADB’s policy is to recognize transfers in and transfers out of levels as of the end of the reporting period in which they occur.

Accounting Estimates

The preparation of financial statements in conformity with generally accepted accounting principles requires management to make reasonable estimates and assumptions that affect the reported amounts of assets and liabilities and uncommitted balances as of the end of the year and the reported amounts of revenue and expenses during the year. The actual results could differ from those estimates.

Accounting and Reporting Developments

In April 2011, the FASB issued Accounting Standards Update (ASU) 2011-03, “Transfers and Servicing (Topic 860) – Reconsideration of Effective Control for Repurchase Agreements.” The update removes from the assessment of effective control the criterion requiring the transferor to have the ability to repurchase or redeem the financial assets on substantially the agreed terms, even in the event of default by the transferee. It does not change the other criteria used in the assessment of effective control. The revised guidance is effective from quarter ended 31 March 2012 for ADB. This update did not have an impact on TASF’s financial statements.

In May 2011, the FASB issued ASU 2011-04, “Fair Value Measurement (Topic 820) – Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in US GAAP and IFRSs,” which provides consistency between US GAAP and International Financial Reporting Standards (IFRSs) on the

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definition of fair value (FV) and guidance on how to measure FV and on what to disclose about FV measurements. The amendments to the update do not require additional FV measurements and are not intended to establish valuation standards or affect valuation practices outside of financial reporting. The new guidance is effective from quarter ended 31 March 2012 for ADB. This update did not have an impact on TASF’s financial statements.

In December 2011, the FASB issued ASU 2011-11, “Balance Sheet (Topic 210) – Disclosures about Offsetting Assets and Liabilities”, to provide enhanced disclosures that will enable users of its financial statements to evaluate the effect or potential effect of netting arrangements on an entity’s financial position. An entity is required to apply the amendments for annual reporting periods beginning on or after 1 January 2013, and interim periods within those annual periods. ADB is currently assessing the impact of this update on TASF’s financial statements.

Statement of Cash Flows

For the purposes of the Statement of Cash Flows, the TASF considers that its cash and cash equivalents are limited to DUE FROM BANKS, which consists of cash on hand and current accounts in banks used for (i) operational disbursements, (ii) receipt of funds from encashment of donor countries’ promissory notes, and (iii) clearing accounts.

NOTE C—INVESTMENTS

The main investment management objective is to maintain security and liquidity. Subject to these parameters, ADB seeks the highest possible return on its investments. Investments are governed by the Investment Authority approved by the Board of Directors in 2006.

All investments held as of 31 December 2012 and 2011 were in time deposits.

The currency composition of the investment portfolio as of 31 December 2012 and 2011 expressed in United States dollars was as follows:

Currency United States dollar Australian dollar Pound sterling Canadian dollar Euro Total	2012 2011 $ 268,108,000 $ 249,069,000 58,967,000 50,306,000 24,808,000 21,279,000 24,773,000 20,155,000 – 40,186,000 376,656,000 $ 380,995,000 $

The annualized rate of return on the average investments held during the year including securities purchased under resale arrangements, based on the portfolio held at the beginning and end of each month was 0.73% (0.89% – 2011).

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TASF-6

continued

Fair Value Disclosure

The fair value of investments as of 31 December 2012 and 2011 was as follows:

Assets Investments Time deposits Securities purchased under resale arrangements Total assets at fair value	31 December 2012 376,656,000 $ 40,017,000 416,673,000 $	Fair Value Measurements	Fair Value Measurements
		Level 1 – $ – – $	Level 2 Level 3 376,656,000 $ – $ 40,017,000 – 416,673,000 $ – $
Assets Investments Time deposits Securities purchased under resale arrangements Total assets at fair value	31 December 2011 380,995,000 $ 10,923,000 391,918,000 $	Fair Value Measurements
		Level 1 – $ – – $	Level 2 Level 3 380,995,000 $ – $ 10,923,000 – 391,918,000 $ – $

If available, investment securities are fair valued based on active market quotes. For investments where active market quotes are not available, the valuation is based on discounted cash flow models using market observable inputs, such as interest rates, foreign exchange rates, basis spreads, cross currency rates, and volatilities. Time deposits are reported at cost, which approximates fair value.

ADB maintains documented process and internal controls to value the investment securities. The data management unit in treasury department is responsible for providing the valuation in accordance with the business process.

NOTE D—RELATED PARTY TRANSACTIONS

The OCR and special funds resources are at all times used, committed, and invested entirely separate from each other. Under ADF IX and ADF X, a specific portion of the total contributions under each is to be allocated to TASF as third and fourth regularized replenishments, respectively. ADF receives the contributions from members and subsequently transfers the specified portion to TASF. Regional technical assistance projects and programs activities may be cofinanced by ADB’s other special funds and trust funds administered by ADB (Agency Trust Funds). Interfund accounts are settled regularly between TASF and the other funds.

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TASF-6

continued

The interfund account balances included in ADVANCES FOR GRANTS AND OTHER ASSETS and ACCOUNTS PAYABLE AND OTHER LIABILITIES are as follows:

Receivable from: Ordinary capital resources Japan Special Fund Climate Change Fund Agency Trust Funds—net Total Payable to: Ordinary capital resources Regional Cooperation and Integration Fund Climate Change Fund Agency Trust Funds—net Total 0 = Less than $500.	2012 2011 2,000 $ – $ 0 11,000 33,000 – 53,000 – 88,000 $ 11,000 $ – $ 2,000 $ 53,000 48,000 – 11,000 – 37,000 53,000 $ 98,000 $

NOTE E—UNDISBURSED COMMITMENTS

Undisbursed commitments are denominated in United States dollars and represent effective ongoing grantfinanced TA projects/programs which are not yet disbursed and unliquidated as of the end of the year. During 2012, $19,162,000 ($18,982,000 – 2011) representing completed and canceled TA projects was written back as a reduction in technical assistance of the period and the corresponding undisbursed commitment was eliminated. The fair value of undisbursed commitments approximates the amounts undisbursed, because ADB expects that disbursements will be made for all projects/programs covered by the commitments.

NOTE F—CONTRIBUTIONS AND UNCOMMITTED BALANCES

Since inception in 1967, direct contributions have been made by 29 member countries. In 2011, Pakistan made a direct and voluntary contribution amounting to $70,000.

In 1986, 1992, 2005 and 2009, the Board of Governors of ADB, in authorizing replenishments of the ADF, provided for allocations to the TASF in aggregate amounts equivalent to $72,000,000, $141,000,000, $220,000,000 and $288,000,000, respectively, to be used for technical assistance to ADF borrowing DMCs and for regional technical assistance. During the year, the fund received $81,807,000 under ADF X replenishment, leaving a total of $40,068,000 ($8,206,000 – ADF IX; $31,862,000 – ADF X) as DUE FROM CONTRIBUTORS.

In 2012, $40,000,000 was allocated from OCR net income to TASF bringing the accumulated allocation from OCR net income to $849,000,000.

Some of the direct contributions received can be subject to restricted procurement sources, while some are given on condition that the technical assistance be made on a reimbursable basis. The total contributions received for the years ended 31 December 2012 and 2011 were without any restrictions.

Uncommitted balances comprise amounts which have not been committed by ADB as of 31 December 2012 and 2011. These balances include approved TA projects/programs that are not yet effective.

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continued

NOTE G—OTHER FAIR VALUE DISCLOSURES

As of 31 December 2012 and 2011, TASF has no assets or liabilities measured at fair value on a nonrecurring basis. See Notes C and E for discussions relating to investments and undisbursed commitments, respectively. In all other cases, the carrying amounts of TASF’s assets and liabilities are considered to approximate fair values.

NOTE H—SUBSEQUENT EVENTS

ADB has evaluated subsequent events after 31 December 2012 through 8 March 2013, the date these Financial Statements are available for issuance. As a result of this evaluation, there are no subsequent events, as defined, that require recognition or disclosure in the TASF’s Financial Statements as of 31 December 2012.

142

JAPAN SPECIAL FUND MANAGEMENT’S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING

The management of Asian Development Bank (“ADB”) is responsible for establishing and maintaining adequate internal control over financial reporting. ADB’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles in the United States of America.

ADB’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of ADB; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles in the United States of America, and that receipts and expenditures of ADB are being made only in accordance with authorizations of management and directors of ADB; and (iii) provide reasonable assurance regarding prevention or timely detection and correction of unauthorized acquisition, use, or disposition of ADB’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 misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

ADB’s management assessed the effectiveness of ADB’s internal control over financial reporting as of 31 December 2012. In making this assessment, ADB’s management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission in Internal Control – Integrated Framework. Based on that assessment, management believes that as of 31 December 2012, ADB’s internal control over financial reporting is effective based upon the criteria established in Internal Control – Integrated Framework.

Haruhiko Kuroda President Thierry de Longuemar Vice-President (Finance and Risk Management)

Simon T. Bradbury Controller

8 March 2013

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Deloitte & Touche LLP Certified Public Accountants Unique Entity No. T08LL0721A 6 Shenton Way, Tower Two #32-00 Singapore 068809

Tel: +65 6224 8288 Fax: +65 6538 6166 www.deloitte.com

INDEPENDENT AUDITORS’ REPORT

To the Board of Directors and the Board of Governors of Asian Development Bank

We have audited management's assertion, included in the accompanying Management’s Report on Internal Control over Financial Reporting, that Asian Development Bank ("ADB") maintained effective internal control over financial reporting as of December 31, 2012, based on the criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. ADB's management is responsible for maintaining effective internal control over financial reporting and for its assertion of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on management's assertion based on our audit.

We conducted our audit in accordance with attestation standards established by the American Institute of Certified Public Accountants. 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. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

ADB’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with accounting principles generally accepted in the United States of America. ADB'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 ADB; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with accounting principles generally accepted in the United States of America, and that receipts and expenditures of ADB are being made only in accordance with authorizations of management and directors of ADB; and (3) provide reasonable assurance regarding prevention or timely detection and correction of unauthorized acquisition, use, or disposition of ADB’s assets that could have a material effect on the financial statements.

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Because of the inherent limitations of internal control over financial reporting, including the possibility of collusion or improper management override of controls, material misstatements due to error or fraud may not be prevented or detected and corrected on a timely basis. Also, projections of any evaluation of the effectiveness of the internal control over financial reporting to future periods are subject to the risk that the controls may become inadequate because of changes in conditions or that the degree of compliance with the policies or procedures may deteriorate.

In our opinion, management’s assertion that ADB maintained effective internal control over financial reporting as of December 31, 2012, is fairly stated, in all material respects, based on the criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission.

We have also audited, in accordance with auditing standards generally accepted in the United States of America, the accompanying statement of financial position of Asian Development Bank (“ADB”) – Japan Special Fund as of December 31, 2012 and 2011 and the related statements of activities and changes in net assets, and cash flows for the years then ended and the related notes to the financial statements. Our report dated March 8, 2013 expressed an unqualified opinion on those financial statements.

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Public Accountants and Certified Public Accountants

Singapore March 8, 2013

145

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Deloitte & Touche LLP Certified Public Accountants Unique Entity No. T08LL0721A 6 Shenton Way, Tower Two #32-00 Singapore 068809

Tel: +65 6224 8288 Fax: +65 6538 6166 www.deloitte.com

INDEPENDENT AUDITORS’ REPORT

To the Board of Directors and the Board of Governors of Asian Development Bank

We have audited the accompanying financial statements of Asian Development Bank (“ADB”) – Japan Special Fund which comprise the statement of financial position as of December 31, 2012 and 2011, and the related statements of activities and changes in net assets, and cash flows for the years then ended, 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 accounting principles generally accepted in the United States of America; 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.

An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditor’s 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.

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Opinion

In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of ADB - Japan Special Fund as of December 31, 2012 and 2011, and the results of its operations and its cash flows for the years then ended in accordance with accounting principles generally accepted in the United States of America.

Report on Management’s Assertion on Internal Control over Financial Reporting

We have also audited, in accordance with attestation standards established by the American Institute of Certified Public Accountants, management’s assertion that ADB maintained effective internal control over financial reporting as of December 31, 2012, based on the criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated March 8, 2013 expressed an unqualified opinion on management’s assertion that ADB maintained effective internal control over financial reporting.

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Public Accountants and Certified Public Accountants

Singapore March 8, 2013

147

JSF-1

ASIAN DEVELOPMENT BANK—JAPAN SPECIAL FUND STATEMENT OF FINANCIAL POSITION 31 December 2012 and 2011

Expressed in Thousands of United States Dollars

2012 JSF Regular and ACCSF Supplementary Total ASSETS DUE FROM BANKS 185 $ 384 $ 569 $ INVESTMENTS (Notes C and G) Government or government-guaranteed obligations 3,000 19,994 22,994 Time deposits 33,616 61,925 95,541 36,616 81,919 118,535 ACCRUED REVENUE 2 5 7 ADVANCES FOR TECHNICAL ASSISTANCE AND OTHER ASSETS (Note D)1 – 1,419 1,419	2012	2012	2012	2011	2011	2011
				JSF Regular and ACCSF Supplementary Total 172 $ 216 $ 388 $ 2,991 – 2,991 33,546 93,890 127,436 36,537 93,890 130,427 2 4 6 – 1,807 1,806
	185 $ 3,000 33,616	384 $ 19,994 61,925	569 $ 22,994 95,541	172 $ 2,991 33,546	216 $ – 93,890	388 $ 2,991 127,436
	36,616	81,919	118,535	36,537	93,890	130,427
		5 1,419	7 1,419	2 –	4 1,807	6 1,806
TOTAL1	36,803 $	83,727 $	120,530 $	36,711 $	95,917 $	132,627 $
LIABILITIES AND NET ASSETS ACCOUNTS PAYABLE AND OTHER LIABILITIES (Note D) 1 UNDISBURSED COMMITMENTS (Notes E and G) Technical assistance TOTAL LIABILITIES1 NET ASSETS (JSF-2), represented by: Uncommitted balances (Note F) Unrestricted Temporarily restricted Net accumulated investment income (Note F) Temporarily restricted	0 $ –	49 $ 22,409	49 $ 22,409	1 $ –	62 $ 38,432	62 $ 38,432
	–	22,458	22,458	1	38,494	38,494
	– 28,199	61,269 –	61,269 28,199	– 28,199	57,423 –	57,423 28,199
	28,199 8,604	61,269 –	89,468 8,604	28,199 8,511	57,423 –	85,622 8,511
	36,803	61,269	98,072	36,710	57,423	94,133
TOTAL1	36,803 $	83,727 $	120,530 $	36,711 $	95,917 $	132,627 $

0 = Less than $500.

1 Numbers may not sum precisely due to elimination of interfund account ($1,000 – 2011).

The accompanying notes are an integral part of these financial statements (JSF-4).

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JSF-2

ASIAN DEVELOPMENT BANK—JAPAN SPECIAL FUND STATEMENT OF ACTIVITIES AND CHANGES IN NET ASSETS For the Years Ended 31 December 2012 and 2011

Expressed in Thousands of United States Dollars

CHANGES IN UNRESTRICTED NET ASSETS REVENUE FROM INVESTMENTS (Note C) REVENUE FROM OTHER SOURCES NET ASSETS REVERTED FROM TEMPORARILY RESTRICTED ASSETS Total EXPENSES Technical assistance—net (Note E) Administrative and financial expenses Total REVENUE IN EXCESS OF EXPENSES EXCHANGE LOSSES—net INCREASE IN UNRESTRICTED NET ASSETS CHANGES IN TEMPORARILY RESTRICTED NET ASSETS REVENUE FROM INVESTMENTS AND OTHER SOURCES NET ASSETS REVERTED TO TEMPORARILY RESTRICTED ASSETS INCREASE IN TEMPORARILY RESTRICTED NET ASSETS INCREASE IN NET ASSETS NET ASSETS AT BEGINNING OF YEAR		2012	2012		2011	2011
	ACCSF	JSF Regular and Supplementary Total 176 $ 176 $ 5 5 – 0 181 181 (3,986) (3,986) 316 316 (3,670) (3,670) 3,851 3,851 (5) (5) 3,846 3,846 – 93 – (0) – 93 3,846 3,939 57,423 94,133		ACCSF	JSF Regular and Supplementary Total 217 $ 217 $ 14 14 – 1 231 232 (4,691) (4,691) 304 305 (4,387) (4,386) 4,618 4,618 (5) (5) 4,613 4,613 – 57 – (1) – 56 4,613 4,669 52,810 89,464
	– $ – 0	176 $ 5 –	176 $ 5 0	– $ 0 1	217 $ 14 –	217 $ 14 1
	0	181	181	1	231	232
	– 0	(3,986) 316	(3,986) 316	– 1	(4,691) 304	(4,691) 305
	0	(3,670)	(3,670)	1	(4,387)	(4,386)
	– –	3,851 (5)	3,851 (5)	0 –	4,618 (5)	4,618 (5)
	–	3,846	3,846	0	4,613	4,613
	93 (0)	– –	93 (0)	57 (1)	– –	57 (1)
	93	–	93	56	–	56
	93 36,710	3,846 57,423	3,939 94,133	56 36,654	4,613 52,810	4,669 89,464
NET ASSETS AT END OF YEAR	36,803 $	61,269 $	98,072 $	36,710 $	57,423 $	94,133 $

0 = Less than $500. The accompanying notes are an integral part of these financial statements (JSF-4).

149

JSF-3

ASIAN DEVELOPMENT BANK—JAPAN SPECIAL FUND STATEMENT OF CASH FLOWS For the Years Ended 31 December 2012 and 2011

Expressed in Thousands of United States Dollars

CASH FLOWS FROM OPERATING ACTIVITIES Interest on investments received Net cash received from other sources Technical assistance disbursed Administrative and financial expenses paid Net Cash Provided by (Used in) Operating Activities CASH FLOWS FROM INVESTING ACTIVITIES Maturities of investments Purchases of investments Net Cash (Used in) Provided by Investing Activities Effect of Exchange Rate Changes on Due from Banks Net Increase (Decrease) in Due from Banks Due from Banks at Beginning of Year Due from Banks at End of Year RECONCILIATION OF INCREASE IN NET ASSETS TO NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES: Increase in net assets (JSF-2) Adjustments to reconcile increase in net assets to net cash provided by (used in) operating activities: Amortization of discounts on investments Unrealized investment (gains) losses Change in undisbursed commitments Others—net Exchange losses—net Net Cash Provided by (Used in) Operating Activities		2012	Total 266 $ 5 (11,667) (317) (11,713) 5,448,672 (5,436,778) 11,894 (0) 181 388 569 $ 3,939 $ – (3) (16,023) 371 3 (11,713) $		2011
	ACCSF 85 $ 0 – (1) 84 1,813,708 (1,813,779) (71) – 13 172 185 $ 93 $ – (9) – (0) – 84 $	JSF Regular and Supplementary 181 $ 5 (11,667) (316) (11,797) 3,634,964 (3,622,999) 11,965 (0) 168 216 384 $ 3,846 $ – 6 (16,023) 371 3 (11,797) $		ACCSF 65 $ 0 – (1) 64 2,015,297 (2,015,259) 38 – 102 70 172 $ 56 $ (0) 8 – – – 64 $	JSF Regular and Supplementary 226 $ 10 (27,341) (438) (27,543) 5,085,747 (5,058,273) 27,474 0 (69) 285 216 $ 4,613 $ – – (34,080) 1,923 1 (27,543) $	Total
						291 $ 10 (27,341) (439)
						(27,479)
						7,101,044 (7,073,532)
						27,512
						0
						33 355
						388 $
						4,669 $ (0) 8 (34,080) 1,923 1
						(27,479) $

0 = Less than $500.

The accompanying notes are an integral part of these financial statements (JSF-4).

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JSF-4

ASIAN DEVELOPMENT BANK—JAPAN SPECIAL FUND NOTES TO FINANCIAL STATEMENTS 31 December 2012 and 2011

NOTE A—NATURE OF OPERATIONS

The Asian Development Bank (ADB), a multilateral development financial institution, was established in 1966 with its headquarters in Manila, Philippines. ADB and its operations are governed by the Agreement Establishing the Asian Development Bank (the Charter). Its purpose is to foster economic development and co-operation in Asia and the Pacific region and to contribute to the acceleration of the process of economic development of the developing member countries (DMCs) in the region, collectively and individually. Since 1999, ADB’s corporate vision and mission has been to help DMCs reduce poverty in the region. This was reaffirmed under the long-term strategic framework for 2008-2020 (Strategy 2020). Under Strategy 2020, ADB’s corporate vision continues to be “An Asia and Pacific Free of Poverty” and its mission has been to help its DMCs reduce poverty and improve living conditions and quality of life. ADB has been pursuing its mission and vision by focusing on three complementary strategic agendas: inclusive growth, environmentally sustainable growth, and regional integration. ADB provides financial and technical assistance for projects and programs, which will contribute to achieving this purpose. These are financed through ordinary capital resources (OCR) and Special Funds.[1]

The JSF was established in March 1988 when the Government of Japan and ADB entered into a financial arrangement whereby the Government of Japan agreed to make an initial contribution and ADB became the administrator. The purpose of JSF is to help DMCs of ADB restructure their economies and broaden the scope of opportunities for new investments, thereby assisting the recycling of funds to DMCs of ADB. While JSF resources are used mainly to finance technical assistance (TA) operations, these resources may also be used for equity investment operations in ADB’s DMCs. Under the agreement between ADB and Japan, ADB may invest the proceeds of JSF pending disbursement.

In March 1999, the Board approved the acceptance and administration by ADB of the Asian Currency Crisis Support Facility (ACCSF) to assist Asian currency crisis-affected member countries (CAMCs). Funded by the Government of Japan, ACCSF was established within JSF to assist in the economic recovery of CAMCs through interest payment assistance (IPA) grants, TA grants, and guarantees. With the general fulfillment of the purpose of the facility, the Government of Japan and ADB agreed to terminate the ACCSF on 22 March 2002 and all projects were financially completed as of 31 December 2011. Subject to the Government of Japan’s instruction, the remaining funds will be retained in ACCSF.

ADB is immune from taxation pursuant to Chapter VIII, Article 56, Exemption from Taxation , of the Charter.

NOTE B—SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Presentation of the Financial Statements

The financial statements of JSF are prepared in accordance with accounting principles generally accepted in the United States of America (US GAAP), and are presented on the basis of those for not-for-profit organizations and as unrestricted and temporarily restricted net assets. ACCSF funds are separately reported in the financial statements.

JSF reports the contributions of cash and other assets as restricted support if they are received with donor stipulations that limit the use of the donated assets. When the donor restriction expires, that is, when a stipulated time or purpose restriction is accomplished, temporarily restricted net assets are reclassified to unrestricted net assets and reported in the Statement of Activities and Changes in Net Assets as NET ASSETS REVERTED TO TEMPORARILY RESTRICTED ASSETS.

1 Asian Development Fund (ADF), Technical Assistance Special Fund (TASF), Japan Special Fund (JSF), ADB Institute (ADBI), Pakistan Earthquake Fund (PEF), Regional Cooperation and Integration Fund (RCIF), Climate Change Fund (CCF), and Asia Pacific Disaster Response Fund (APDRF).

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Functional and Reporting Currency

The United States dollar is the functional and reporting currency, representing the currency of the primary economic operating environment of JSF.

Translation of Currencies

ADB adopts the use of daily exchange rates for accounting and financial reporting purposes. This allows transactions denominated in non-US dollar currencies to be translated to the reporting currency using exchange rates applicable at the time of transactions. Contributions included in the financial statements during the year are recognized at applicable exchange rates as of the respective dates of commitment. At the end of each accounting month, translations of assets, liabilities, and uncommitted balances which are denominated in non-US dollar currencies are adjusted using the applicable rates of exchange at the end of the reporting period. These translation adjustments are accounted for as exchange gains or losses and are credited or charged to operations.

Investments

All investment securities held by JSF are reported at fair value. Realized and unrealized gains and losses are included in revenue.

Interest income on investment securities and time deposits are recognized as realized and reported, net of amortizations of premiums and discounts, as REVENUE FROM INVESTMENTS.

Technical Assistance and Undisbursed Commitments

Technical assistance is recognized in the financial statements when the project is approved and becomes effective. Upon completion of a TA project or cancellation of a grant, any undisbursed amount is written back as a reduction in the TA for the year and the corresponding undisbursed commitment is eliminated accordingly.

Advances are provided from technical assistance grant funds to the executing agency or co-operating institution, for the purpose of making payments for eligible expenses. The advances are subject to liquidation and charged against undisbursed commitments. Any unutilized portion is required to be returned to the fund. These are included in ADVANCES FOR TECHNICAL ASSISTANCE AND OTHER ASSETS.

Fair Value of Financial Instruments

ASC 820 defines fair value as the price that would be received to sell an asset or paid to transfer a liability at measurement date in an orderly transaction among willing participants with an assumption that the transaction takes place in the entity’s principal market, or in the absence of principal market, in the most advantageous market for the asset or liability. The most advantageous market is the market where the sale of the asset or transfer of liability would maximize the amount received for the asset or minimize the amount paid to transfer the liability. The fair value measurement is not adjusted for transaction costs.

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Fair Value Hierarchy

ASC 820 establishes a fair value hierarchy that gives the highest priority to quoted prices in active markets for identical assets or liabilities (Level 1), next priority to observable market inputs or market corroborated data (Level 2), and the lowest priority to unobservable inputs without market corroborated data (Level 3).

The fair values of ADB’s financial assets and liabilities are categorized as follows:

Level 1: fair values are based on unadjusted quoted prices for identical assets or liabilities in active markets.

Level 2: fair values are based on quoted prices for similar assets or liabilities in active markets or markets that are not active; or valuation models for which significant inputs are obtained from marketbased data that are observable.

Level 3: fair values are based on prices or valuation models for which significant inputs to the model are unobservable.

Inter-level transfers from one year to another may occur due to changes in market activities affecting the availability of quoted market prices or observable market data.

ADB’s policy is to recognize transfers in and transfers out of levels as of the end of the reporting period in which they occur.

Accounting Estimates

The preparation of financial statements in conformity with generally accepted accounting principles requires management to make reasonable estimates and assumptions that affect the reported amounts of assets and liabilities as of the end of the year and the reported amounts of income and expenses during the year. The actual results could differ from those estimates.

Accounting and Reporting Developments

In May 2011, the Financial Accounting Standards Board issued Accounting Standards Update 2011-04, “Fair Value Measurement (Topic 820) – Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in US GAAP and IFRSs,” which provides consistency between US GAAP and International Financial Reporting Standards (IFRSs) on the definition of fair value (FV) and guidance on how to measure FV and on what to disclose about FV measurements. The amendments to the update do not require additional FV measurements and are not intended to establish valuation standards or affect valuation practices outside of financial reporting. The new guidance is effective from quarter ended 31 March 2012 for ADB. This update did not have an impact on JSF’s financial statements.

Statement of Cash Flows

For the purposes of the Statement of Cash Flows, the JSF considers that its cash and cash equivalents are limited to DUE FROM BANKS, which consists of cash on hand and current accounts in banks used for operational disbursements.

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NOTE C—INVESTMENTS

The main investment management objective is to maintain security and liquidity. Subject to these parameters, ADB seeks the highest possible return on its investments. Investments are governed by the Investment Authority approved by the Board of Directors in 2006.

The annualized rates of return on the average investments held under ACCSF and JSF during the year, based on the portfolio held at the beginning and end of each month were 0.25% and 0.21%, respectively (0.16% and 0.21%, respectively – 2011).

Fair Value Disclosure

The fair value of investments as of 31 December 2012 and 2011 was as follows:

Assets Investments Government or government- guaranteed obligations Time deposits Total assets at fair value	31 December 2012 22,994,000 $ 95,541,000 118,535,000 $	Fair Value Measurements	Fair Value Measurements
		Level 1 22,994,000 $ – 22,994,000 $	Level 2 Level 3 – $ – $ 95,541,000 – 95,541,000 $ – $
Assets Investments Government or government- guaranteed obligations Time deposits Total assets at fair value	31 December 2011 2,991,000 $ 127,436,000 130,427,000 $	Fair Value Measurements
		Level 1 2,991,000 $ – 2,991,000 $	Level 2 Level 3 – $ – $ 127,436,000 – 127,436,000 $ – $

If available, investment securities are fair valued based on active market quotes. These include government/government-backed obligations. Time deposits are reported at cost, which approximates fair value.

ADB maintains documented process and internal controls to value the investment securities. The data management unit in treasury department is responsible for providing the valuation in accordance with the business process.

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NOTE D—RELATED PARTY TRANSACTIONS

The OCR and special funds resources are at all times used, committed, and invested entirely separate from each other. The administrative and operational expenses pertaining to JSF are settled regularly with OCR and other funds. Regional technical assistance projects and programs may be combined activities financed by special and trust funds.

The interfund balances between other funds, which are included in ADVANCES FOR TECHNICAL ASSISTANCE AND OTHER ASSETS and ACCOUNTS PAYABLE AND OTHER LIABILITIES were as follows:

JSF from: ACCSF Agency Trust Funds—net Total JSF to: Ordinary capital resources Technical Assistance Special Fund Regional Cooperation and Integration Fund Total ACCSF to: JSF 0 = Less than $500. Amounts Receivable by: Amounts Payable by:	2012 2011 0 $ 1,000 $ – 6,000 0 $ 7,000 $ 25,000 $ 12,000 $ 0 11,000 7,000 – 32,000 $ 23,000 $ 0 $ 1,000 $

NOTE E—UNDISBURSED COMMITMENTS

Undisbursed commitments are denominated in United States dollars and represent effective TA projects/programs not yet disbursed and unliquidated. Completed but partially cancelled TA projects amounting to $4,836,000 were written back as a reduction in technical assistance during 2012 ($5,391,000 – 2011), and the corresponding undisbursed commitments was eliminated. None of this amount corresponds to ACCSF (nil – 2011). The fair value of undisbursed commitments approximates the amounts outstanding, because ADB expects that disbursements will substantially be made for all the projects/programs covered by the commitments.

NOTE F—UNCOMMITTED BALANCES

Effective 31 December 2002, all remaining temporarily restricted net assets under JSF were transferred and integrated into the unrestricted regular net assets, as concurred by Japan, in order to optimize the use of JSF. Similarly, Japan lifted the restriction over the use of net accumulated investment income, which under the original terms of agreement between ADB and Japan, may only be used for defraying JSF’s administrative expenses. Japan agreed to use the net accumulated investment income as additional resources for funding future JSF operations.

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Uncommitted balances comprise amounts which have not been committed by ADB as of 31 December 2012 and 2011. These balances include approved TA projects/programs that are not yet effective. As of 31 December 2012 and 2011 these balances were as follows:

Uncommitted balances TA projects/programs approved by Japan and not yet effective Uncommitted balances available for new commitments		2012	Total 89,468,000 $ (470,000) 88,998,000 $		2011
	ACCSF	JSF Regular and Supplementary		ACCSF	JSF Regular and Supplementary Total 57,423,000 $ 85,622,000 $ (1,320,000) (1,320,000) 56,103,000 $ 84,302,000 $
	28,199,000 $ –	61,269,000 $ (470,000)		28,199,000 $ –
	28,199,000 $	60,799,000 $		28,199,000 $

The temporarily restricted uncommitted balance remaining available as of 31 December 2012 corresponds to funds under ACCSF of $28,199,000 ($28,199,000 – 2011) and the amount of net accumulated investment income of $8,604,000 ($8,511,000 – 2011) for settlement of all administrative expenses.

Net assets reverted to temporarily restricted assets under ACCSF relate to savings on financially completed technical assistance net of amounts from accumulated investment income, released from restrictions to defray the administrative expenses of ACCSF.

NOTE G—OTHER FAIR VALUE DISCLOSURES

As of 31 December 2012 and 2011, JSF has no assets or liabilities measured at fair value on a nonrecurring basis. See Notes C and E for discussions relating to investments and undisbursed commitments, respectively. In all other cases, the carrying amounts of JSF’s assets and liabilities are considered to approximate fair values.

NOTE H—SUBSEQUENT EVENTS

ADB has evaluated subsequent events after 31 December 2012 through 8 March 2013, the date these Financial Statements are available for issuance. As a result of this evaluation, there are no subsequent events, as defined, that require recognition or disclosure in the JSF’s Financial Statements as of 31 December 2012.

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Deloitte Touche Tohmatsu LLC MS Shibaura Building 4-13-23, Shibaura Minato-ku, Tokyo 108-8530 Japan Tel: +81 (3) 3457 7321 Fax: +81 (3) 3457 1694 www.deloitte.com/jp

INDEPENDENT AUDITORS’ REPORT

To the Board of Directors of Asian Development Bank:

We have audited the accompanying financial statements of Asian Development Bank — ("ADB") Asian Development Bank Institute, which comprise the statement of financial position as of December 31, 2012 and 2011, and the related statements of activities and changes in net assets, and cash flows for the years then ended, and the related notes to the financial statements.

Management's Responsibility for the Financial Statements

Asian Development Bank Institute's (the "Institute") management is responsible for the preparation and fair presentation of these financial statements in accordance with accounting principles generally accepted in the United States of America; 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.

An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditor's 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 Institute's preparation and fair presentation of the financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Institute's internal control. Accordingly, we express no such opinion. 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.

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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 ADB Asian Development Bank Institute as of December 31, 2012 and 2011, and the results of its operations and its cash flows for the years then ended in accordance with accounting principles generally accepted in the United States of America.

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March 8, 2013

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ASIAN DEVELOPMENT BANK—ASIAN DEVELOPMENT BANK INSTITUTE STATEMENT OF FINANCIAL POSITION

31 December 2012 and 2011

Expressed in Thousands of United States Dollars

ASSETS DUE FROM BANKS SECURITIES PURCHASED UNDER RESALE ARRANGEMENTS (Notes C and L) PROPERTY, FURNITURE, AND EQUIPMENT (Note D) Property, Furniture, and Equipment Less—allowance for depreciation DUE FROM CONTRIBUTORS (Note G) LONG-TERM GUARANTEE DEPOSITS (Note E) OTHER ASSETS	3,390 $ 6,514 3,886 $ 3,809 77 7,818 1,862 712 2012	2011
		1,473 $ 5,982 4,344 $ 4,189 155 8,779 2,081 654
TOTAL	20,373 $	19,124 $
LIABILITIES AND UNCOMMITTED BALANCES ACCOUNTS PAYABLE AND OTHER LIABILITIES Accrued pension and postretirement medical benefits (Note K) Asset reinstatement obligations (Note F) Others (Note J) UNCOMMITTED BALANCES (ADBI-2) Unrestricted net assets	7,405 $ 1,258 1,373 10,036 $ 10,337	6,553 $ 1,406 1,329 9,288 $ 9,836
TOTAL	20,373 $	19,124 $

The accompanying notes are an integral part of these financial statements (ADBI-4).

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ASIAN DEVELOPMENT BANK—ASIAN DEVELOPMENT BANK INSTITUTE STATEMENT OF ACTIVITIES AND CHANGES IN NET ASSETS For the Years Ended 31 December 2012 and 2011

STATEMENT OF ACTIVITIES AND CHANGES IN NET ASSETS For the Years Ended 31 December 2012 and 2011
Expressed in Thousands of United States Dollars
CHANGES IN UNRESTRICTED NET ASSETS CONTRIBUTIONS (Note G) REVENUE From rental (Note H) From investments (Note C) From other sources—net Total EXPENSES Administrative expenses (Note I) Program expenses Total CONTRIBUTIONS AND REVENUE IN EXCESS OF EXPENSES EXCHANGE (LOSSES) GAINS—net TRANSLATION ADJUSTMENTS PENSION/POST RETIREMENT LIABILITY ADJUSTMENT - ASC 715 AND 958 (Note K) INCREASE IN UNRESTRICTED NET ASSETS NET ASSETS AT BEGINNING OF YEAR	2012 18,490 $ 473 5 40 19,008 11,583 5,408 16,991 2,017 (446) (845) (225) 501 9,836	2011
		17,663 $ 496 5 74
		18,238
		11,149 6,278
		17,427
		811 186 495 (572)
		920 8,916
NET ASSETS AT END OF YEAR	10,337 $	9,836 $

The accompanying notes are an integral part of these financial statements (ADBI-4).

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ASIAN DEVELOPMENT BANK—ASIAN DEVELOPMENT BANK INSTITUTE STATEMENT OF CASH FLOWS For the Years Ended 31 December 2012 and 2011

Expressed in Thousands of United States Dollars

CASH FLOWS FROM OPERATING ACTIVITIES Contributions received Interest on investments received Expenses paid Others—net Net Cash Provided by Operating Activities CASH FLOWS FROM INVESTING ACTIVITIES Maturities of investments Purchases of investments Receipts from securities purchased under resale arrangements Payments for securities purchased under resale arrangements Acquisition of equipment Net Cash Used in Investing Activities Effect of Exchange Rate Changes on Due from Banks Net Increase in Due from Banks Due from Banks at Beginning of Year Due from Banks at End of Year RECONCILIATION OF INCREASE IN UNRESTRICTED NET ASSETS TO NET CASH PROVIDED BY OPERATING ACTIVITIES: Increase in unrestricted net assets (ADBI-2) Adjustments to reconcile increase in unrestricted net assets to net cash provided by operating activities: Depreciation Change in due from contributors Change in long-term guarantee deposits Change in other assets Change in accrued pension retirement cost Change in asset reinstatement obligations Change in other liabilities Translation adjustments Others—net Net Cash Provided by Operating Activities	2012 19,456 $ 5 (16,238) 67 3,290 – – 2,375,109 (2,376,842) – (1,733) 360 1,917 1,473 3,390 $ 501 $ 67 966 219 (57) 851 (148) 46 845 (0) 3,290 $	2011
		17,337 $ 5 (16,298) 755
		1,799
		900 (900) 2,223,061 (2,224,037) (111)
		(1,087)
		(58)
		654 819
		1,473 $
		920 $ 66 (326) 303 (123) 1,185 80 189 (495) 0
		1,799 $

0 = Less than $500.

The accompanying notes are an integral part of these financial statements (ADBI-4).

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ASIAN DEVELOPMENT BANK—ASIAN DEVELOPMENT BANK INSTITUTE NOTES TO FINANCIAL STATEMENTS 31 December 2012 and 2011

NOTE A—NATURE OF OPERATIONS

The Asian Development Bank (ADB), a multilateral development financial institution, was established in 1966 with its headquarters in Manila, Philippines. ADB and its operations are governed by the Agreement Establishing the Asian Development Bank (the Charter). Its purpose is to foster economic development and co-operation in Asia and the Pacific region and to contribute to the acceleration of the process of economic development of the developing member countries (DMCs) in the region, collectively and individually. Since 1999, ADB’s corporate vision and mission has been to help DMCs reduce poverty in the region. This was reaffirmed under the long-term strategic framework for 2008-2020 (Strategy 2020). Under Strategy 2020, ADB’s corporate vision continues to be “An Asia and Pacific Free of Poverty” and its mission has been to help its DMCs reduce poverty and improve living conditions and quality of life. ADB has been pursuing its mission and vision by focusing on three complementary strategic agendas: inclusive growth, environmentally sustainable growth, and regional integration. ADB provides financial and technical assistance for projects and programs, which will contribute to achieving this purpose. These are financed through ordinary capital resources (OCR) and Special Funds.[1]

In 1996, ADB approved the establishment of the Asian Development Bank Institute (the Institute) in Tokyo, Japan as a subsidiary body of ADB. The Institute commenced its operations upon the receipt of the first funds from Japan on 24 March 1997, and it was inaugurated on 10 December 1997. The Institute’s funds may consist of voluntary contributions, donations, and grants from ADB member countries, non-government organizations, and foundations. The objectives of the Institute, as defined under its Statute, are the identification of effective development strategies and capacity improvement for sound development management in developing member countries.

ADB is immune from taxation pursuant to Chapter VIII, Article 56, Exemption from Taxation , of the Charter.

NOTE B—SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Presentation of the Financial Statements

The financial statements of the Institute are prepared in accordance with accounting principles generally accepted in the United States of America (US GAAP), and are presented on the basis of those for not-forprofit organizations.

The Institute reports donor’s contributed cash and other assets as unrestricted support as these are made available to the Institute without conditions other than for the purposes of pursuing the objectives of the Institute.

Functional Currency and Reporting Currency

The functional currency of the Institute is Japanese yen. The reporting currency is the United States dollar.

Translation of Currencies

Assets, liabilities, and uncommitted balances are translated from the functional currency to the reporting currency at the applicable rates of exchange at the end of a reporting period. Commitments included in the financial statements during the year are recognized at the applicable exchange rates as of the respective

1 Asian Development Fund (ADF), Technical Assistance Special Fund (TASF), Japan Special Fund (JSF), ADB Institute (ADBI), Pakistan Earthquake Fund (PEF), Regional Cooperation and Integration Fund (RCIF), Climate Change Fund (CCF), and Asia Pacific Disaster Response Fund (APDRF).

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dates of commitment. Revenue and expense amounts are translated for each semi-monthly period generally at the applicable rates of exchange at the beginning of each period; such practice approximates the application of average rates in effect during the period. Translation adjustments are recorded as translation adjustments account and included in changes in unrestricted net assets.

Monetary assets and liabilities denominated in currency other than Japanese yen are translated into Japanese yen at year-end exchange rates. Exchange gains and losses are recorded as exchange (losses) gains - net account and included in the changes in unrestricted net assets.

Securities Purchased Under Resale Arrangements

The Institute accounts for transfer of financial assets in accordance with Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) 860, “Transfers and Servicing.” In general, transfers are accounted for as sales under ASC 860 when control over the transferred assets has been relinquished. Otherwise, the transfers are accounted for as resale arrangements and collateralized financing arrangements. Securities purchased under resale arrangements are recorded as assets and are not repledged.

Interest income on investment securities is recognized as realized and reported net of amortizations of premiums and discounts in revenue from investments.

Property, Furniture, and Equipment

Property, furniture, and equipment are stated at cost and depreciated over their estimated useful lives using the straight-line method. Maintenance, repairs and minor betterments are charged to expense.

Expenditures amounting to more than $30,000 for a single asset or a combination of assets forming an integral part of a separate asset are capitalized.

Contributions

Contributions from donors are included in the financial statements from the date committed.

Fair Value of Financial Instruments

ASC 820 defines fair value as the price that would be received to sell an asset or paid to transfer a liability at measurement date in an orderly transaction among willing participants with an assumption that the transaction takes place in the entity’s principal market, or in the absence of principal market, in the most advantageous market for the asset or liability. The most advantageous market is the market where the sale of the asset or transfer of liability would maximize the amount received for the asset or minimize the amount paid to transfer the liability. The fair value measurement is not adjusted for transaction cost.

Fair Value Hierarchy

ASC 820 establishes a fair value hierarchy that gives the highest priority to quoted prices in active markets for identical assets or liabilities (Level 1), next priority to observable market inputs or market corroborated data (Level 2), and the lowest priority to unobservable inputs without market corroborated data (Level 3).

The fair values of ADB’s financial assets and liabilities are categorized as follows:

Level 1: fair values are based on unadjusted quoted prices for identical assets or liabilities in active markets. Level 2: fair values are based on quoted prices for similar assets or liabilities in active markets or markets that are not active; or valuation models for which significant inputs are obtained from market-based data that are observable.

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Level 3: fair values are based on prices or valuation models for which significant inputs to the model are unobservable.

Inter-level transfers from one year to another may occur due to changes in market activities affecting the availability of quoted market prices or observable market data.

ADB’s policy is to recognize transfers in and transfers out of levels as of the end of the reporting period in which they occur.

Accounting Estimates

The preparation of the financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the end of the year and the reported amounts of revenue and expenses during the year. Actual results could differ from those estimates.

Accounting and Reporting Developments

In April 2011, the FASB issued Accounting Standards Update (ASU) 2011-03, “Transfers and Servicing (Topic 860) – Reconsideration of Effective Control for Repurchase Agreements.” The update removes from the assessment of effective control the criterion requiring the transferor to have the ability to repurchase or redeem the financial assets on substantially the agreed terms, even in the event of default by the transferee. It does not change the other criteria used in the assessment of effective control. The revised guidance is effective from quarter ended 31 March 2012 for the Institute. This update did not have an impact on the Institute’s financial statements.

In May 2011, the FASB issued ASU 2011-04, “Fair Value Measurement (Topic 820) – Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in US GAAP and IFRSs,” which provides the consistency between US GAAP and International Financial Reporting Standards (IFRSs) on the definition of fair value (FV) and on the guidance on how to measure FV and on what to disclose about FV measurements. The amendments to the update do not require additional FV measurements and are not intended to establish valuation standards or affect valuation practices outside of financial reporting. The new guidance is effective from quarter ended 31 March 2012 for the Institute. This update did not have an impact on the Institute’s financial statements.

In December 2011, the FASB issued ASU 2011-11, “Balance Sheet (Topic 210) – Disclosures about Offsetting Assets and Liabilities”, to provide enhanced disclosures that will enable users of its financial statements to evaluate the effect or potential effect of netting arrangements on an entity’s financial position. An entity is required to apply the amendments for annual reporting periods beginning on or after 1 January 2013, and interim periods within those annual periods. The Institute is currently assessing the impact of this update on its financial statements.

Statement of Cash Flows

For the purposes of the Statement of Cash Flows, the Institute considers that its cash and cash equivalents are limited to DUE FROM BANKS, which consists of cash on hand and current accounts in banks used for operational disbursements.

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NOTE C—SECURITIES PURCHASED UNDER RESALE ARRANGEMENTS

The annualized rate of return on the average investments held during the year including receivable for securities purchased under resale arrangements, based on the portfolio held at the beginning and end of each month was 0.05% (0.05% – 2011).

Fair Value Disclosure

The fair value of the following financial assets of the Institute as of 31 December 2012 and 2011 was as follows:

Assets Securities purchased under resale arrangements Assets Securities purchased under resale arrangements		Fair Value Measurements	Fair Value Measurements	Fair Value Measurements
	31 December 2012	Level 1	Level 2	Level 3
	6,514,000 $	– $	6,514,000 $	– $
		Fair Value Measurements
	31 December 2011	Level 1	Level 2	Level 3
	5,982,000 $	– $	5,982,000 $	– $

If available, investment securities are fair value based on active market quotes. For investments, where active market quotes are not available, valuation is based on discounted cash flow model using market observable inputs, such as interest rates, foreign exchange rates, basis spreads, cross currency rates, and volatilities.

The Institute maintains documented process and internal controls to value the investment securities. The data management unit in treasury department is responsible for providing the valuation in accordance with the business process.

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NOTE D—PROPERTY, FURNITURE, AND EQUIPMENT

Property, furniture and equipment consist of one-time establishment cost (comprising office furniture, fixtures and equipment purchased at inception for use in the operations of the Institute) and equipment.

The changes in the property, furniture, and equipment during 2012 and 2011, as well as information pertaining to accumulated depreciation, are as follows:

Cost: Balance, 1 January 2012	Property, Furniture and Equipment
	One-time establishment cost Furniture Equipment Leased Property	Grand Total
	3,704,000 $ 78,000 $ 276,000 $ 286,000 $	4,344,000 $
Additions during the year Disposals during the year Translation adjustments Balance, 31 December 2012	– – – – – – – – (390,000) (8,000) (29,000) (31,000)	– – (458,000)
	3,314,000 70,000 247,000 255,000	3,886,000
Accumulated Depreciation:
Balance, 1 January 2012 Depreciation during the year Disposals during the year Translation adjustments Balance, 31 December 2012 Net Book Value, 31 December 2012	3,704,000 78,000 121,000 286,000 – – 67,000 – – – – – (390,000) (8,000) (18,000) (31,000)	4,189,000 67,000 – (447,000)
	3,314,000 70,000 170,000 255,000	3,809,000
	– $ – $ 77,000 $ – $	77,000 $

Cost: Balance, 1 January 2011	Property, Furniture and Equipment
	One-time establishment cost Furniture Equipment Leased Property	Grand Total
	3,598,000 $ 74,000 $ 156,000 $ 269,000 $	4,097,000 $
Additions during the year Disposals during the year Translation adjustments Balance, 31 December 2011	– – 111,000 – (110,000) – – – 216,000 4,000 9,000 17,000	111,000 (110,000) 246,000
	3,704,000 78,000 276,000 286,000	4,344,000
Accumulated Depreciation:
Balance, 1 January 2011 Depreciation during the year Disposals during the year Translation adjustments Balance, 31 December 2011 Net Book Value, 31 December 2011	3,598,000 74,000 49,000 269,000 – – 66,000 – (110,000) – – – 216,000 4,000 6,000 17,000	3,990,000 66,000 (110,000) 243,000
	3,704,000 78,000 121,000 286,000	4,189,000
	– $ – $ 155,000 $ – $	155,000 $

Total depreciation expense incurred for the year ended 31 December 2012 amounted to $67,000 ($66,000 – 2011).

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NOTE E—LONG-TERM GUARANTEE DEPOSITS

The Institute leases office space and deposit the equivalent of six months of office rent to the lessor, as stipulated in the contract of lease signed in 1997. The amount is updated every contract renewal. The last renewal date was 1 April 2011.

NOTE F—ASSET REINSTATEMENT OBLIGATIONS

The Institute has recorded the estimated asset reinstatement obligations related to leased office space.

NOTE G—CONTRIBUTIONS

In June 2011, the Governments of Japan and Australia committed its 17th and 2nd contributions to the Institute, amounting to ¥675,081,000 ($8,357,000 equivalent) and A$500,000 ($527,000 equivalent), respectively.

In December 2011, the Government of Japan committed its 18th contribution to the Institute amounting to ¥675,081,000 ($8,779,000 equivalent), which was transferred to the Fund on 12 January 2012. At 31 December 2011, the amount committed was reported in Statement of Financial Position as DUE FROM CONTRIBUTORS.

In January 2012, the Republic of Korea committed its 1st contribution to the Institute through the Republic of Korea e-Asia & Knowledge Partnership Fund amounting to $1,500,000.

In June 2012, the Government of Australia committed its 3rd contribution to the Institute amounting A$580,000 ($581,000 equivalent).

In August 2012, the Government of Japan committed its 19th contribution to the Institute amounting to ¥672,070,000 ($8,590,000 equivalent).

In December 2012, the Government of Japan committed its 20th contribution to the Institute amounting to ¥672,070,000 ($7,818,000 equivalent), which was transferred to the Fund on 11 January 2013. At 31 December 2012, the amount committed was reported in Statement of Financial Position as DUE FROM CONTRIBUTORS.

NOTE H—REVENUE FROM RENTAL

Revenue from rental in 2012 consists of sublease rental income of $473,000 ($496,000 – 2011), received according to a space sharing agreement with the Japanese Representative Office of ADB. The transactions with ADB were made in the ordinary course of business and were negotiated at arm’s length.

NOTE I—LEASES

The Institute leases office space and other assets. Rental expenses under operating leases for the years ended 31 December 2012 and 2011 were $4,044,000 and $4,179,000, respectively. As of 31 December 2012, the Institute has the following operating lease commitments, which includes non-cancellable period through 31 March 2012 and cancellable period from 1 April 2012 through 31 March 2014:

Year ending 31 December	Minimum future rentals
2013	3,724,000 $
2014	931,000

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NOTE J—RELATED PARTY TRANSACTIONS

As of 31 December 2012, $138,000 was net payable to OCR ($174,000 – 2011) which is included in ACCOUNTS PAYABLE and OTHER LIABILITIES. The payable results from transactions in the normal course of business.

NOTE K—STAFF RETIREMENT PLAN AND POSTRETIREMENT MEDICAL BENEFITS

Staff Retirement Plan

Eligible employees of the Institute are participants of the ADB Staff Retirement Plan (the Plan), a defined benefit plan. An eligible employee, as defined under the Plan, shall, as a condition of service, become a participant from the first day of service, provided that at such a date, the employee has not reached the normal retirement age of 60. Retirement benefits are based on length of service and highest average remuneration during two years of eligible service. The Plan assets are segregated and are not included in the accompanying Statement of Financial Position. The costs of administering the Plan are absorbed by ADB, except for fees paid to the investment managers and related charges, including custodian fees, which are borne by the Plan.

Participants hired on or before 30 September 2006 are required to contribute 9 1/3% of their salary to the Plan while those hired after that date are not required to contribute to the plan. Participants may also make additional voluntary contributions. The Institute’s contribution is determined at a rate sufficient to cover that part of the costs of the Plan not covered by the participants’ contributions.

Expected Contributions

The expected amount of contributions to the Plan for 2013, based on the Institute’s contribution rate for the coming year of 21%, and the participants’ mandatory contribution are $330,000 and $58,000, respectively (2012 – $333,000 and $37,000).

Investment Strategy

Contributions in excess of current benefits payments are invested in international financial markets and in a variety of investment vehicles. The Plan employs eight external asset managers and one global custodian who function within the guidelines established by the Plan’s Investment Committee. The investment of these assets, over the long term, is expected to produce higher returns than short-term investments. The investment policy incorporates the Plan’s package of desired investment return and tolerance for risk, taking into account the nature and duration of the Plan’s liabilities. The Plan’s assets are diversified among different markets and different asset classes. The use of derivatives for speculation, leverage or taking risks is prohibited. Selected derivatives are used for hedging and transactional efficiency purposes.

The Plan’s investment policy is periodically reviewed and revised to reflect the best interest of the Plan’s participants and beneficiaries. The current policy, adopted in January 2011, specifies an asset-mix structure of 70% of assets in equities and 30% in fixed income securities. At present, investments of the Plan’s assets are divided into three categories: US equity, Non-US equity, and Global fixed income. The Plan’s long-term target asset-mix is 40% US equity, 30% non-US equity and 30% global fixed income.

For the year ended 31 December 2012, the net return on the Plan assets was 13.6% (negative 0.9% – 2011). ADB expects the long-term rate of return on the assets to be 7.5% (7.5% – 2011).

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Assumptions

The assumed overall rate of return takes into account long-term return expectations of the underlying asset classes within the investment portfolio mix, and the expected duration of the Plan’s liabilities. Return expectations are forward looking and, in general, not much weight is given to short-term experience. Unless there is a drastic change in investment policy or market environment, the assumed investment return of 7.5% on the Plan’s assets is expected to remain broadly the same, year to year.

Actuarial assumptions on the 2005-2009 experience were used as the basis for the actuarial valuation as of 31 December 2012 and 2011. These include rates of withdrawal, incapacity retirement rates, mortality rates, percent of international staff who commute, currency reserve, and pattern of the discretionary benefits withdrawal.

Postretirement Medical Benefits Plan

The Institute participates in the cost-sharing plan of ADB for retirees’ medical insurance premiums. Under the plan, the Institute is obligated to pay 75% of the Group Medical Insurance Plan premiums for retirees and their eligible dependents who elected to participate. The cost-sharing plan is currently unfunded.

Generally accepted accounting principles require an actuarially determined assessment of the periodic cost of postretirement medical benefits.

The following table sets forth the pension and postretirement medical benefits at 31 December 2012 and 2011:

Change in benefit obligation: Projected benefit obligation at beginning of year Service cost Interest cost Plan participants’ contributions Actuarial loss (gain) Benefits paid Projected benefit obligation at end of year Change in plan assets: Fair value of plan assets at beginning of year Actual return on plan assets Employer’s contribution Plan participants’ contributions Benefits paid Fair value of plan assets at end of year	Pension	Benefits	Postretirement Medical Benefits
	2012	2011	2012 2011 458,000 $ 413,000 $ 108,000 119,000 28,000 29,000 – – (130,000) (77,000) (26,000) (26,000) 438,000 $ 458,000 $ – $ – $ – – 26,000 26,000 – – (26,000) (26,000) – $ – $
	9,636,000 $ 283,000 492,000 125,000 894,000 (506,000)	8,434,000 $ 256,000 470,000 109,000 692,000 (325,000)
	10,924,000 $ 3,540,000 $ 470,000 329,000 125,000 (506,000)	9,636,000 $
		3,480,000 $ (30,000) 306,000 109,000 (325,000)
	3,958,000 $	3,540,000 $

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table continued	Pension	Benefits	Postretirement Medical Benefits	Postretirement Medical Benefits
	2012	2011	2012	2011
Funded Status Amounts recognized in the Balance sheet consist of: Current liabilities Noncurrent liabilities Net amount recognized Amounts recognized in the Unrestricted net assets consist of: Net actuarial loss (gain) Prior service cost (credit) Net amount recognized Weighted-average assumptions as of 31 December Discount rate	(6,966,000) $ – $ (6,966,000)	(6,096,000) $ – $ (6,096,000)	(438,000) $ – $ (438,000)	(458,000) $ (5,000) $ (453,000)
	(6,966,000) $ 4,069,000 $ –	(6,096,000) $	(438,000) $ (223,000) $ –	(458,000) $
		3,722,000 $ –		(100,000) $ –
	4,069,000 $ 4.30%	3,722,000 $	(223,000) $ 4.30%	(100,000) $
		5.05%		5.05%
Expected return on plan assets	7.50%	7.50%	N/A	N/A
Rate of compensation increase varies with age and averages	3.25%	3.25%	4.00%	3.25%
For measurement purposes, a 7.0% annual rate of increase in the per capita cost of covered health care benefits was assumed for the valuation as of 31 December 2012. The rate was assumed to decrease gradually to 5.0% for 2020 and remain at that level thereafter.
Components of net periodic benefit cost: Service cost Interest cost Expected return on plan assets Recognized actuarial loss Net periodic benefit cost	Pension	Benefits	Postretirement Medical Benefits
	2012	2011	2012 2011 108,000 $ 119,000 $ 28,000 29,000 – – (7,000) – 129,000 $ 148,000 $
	283,000 $ 492,000 (274,000) 351,000	256,000 $ 470,000 (264,000) 336,000
	852,000 $	798,000 $

For measurement purposes, a 7.0% annual rate of increase in the per capita cost of covered health care benefits was assumed for the valuation as of 31 December 2012. The rate was assumed to decrease gradually to 5.0% for 2020 and remain at that level thereafter.

The accumulated benefit obligation of the pension plan as of 31 December 2012 was $10,660,000 ($9,451,000 – 2011).

The estimated net loss for the defined benefit pension plan that will be amortized from accumulated other comprehensive income into net periodic benefit cost over the next fiscal year amounted to $342,000. The estimated net gain for the other postretirement benefits plan that will be amortized from accumulated other comprehensive income into net periodic benefit cost over the next fiscal year is $19,000.

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A one-percentage-point change in assumed health care cost trend rates would have the following effects:

Effect on total service and interest cost components Effect on postretirement benefit obligation	1-Percentage- 1-Percentage- Point Increase Point Decrease 34,000 $ (28,000) $ 110,000 (86,000)

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 31 December 2012:

2013 2014 2015 2016 2017 2018–2022	Pension Postretirement Benefits Medical Benefits 474,000 $ 0 $ 360,000 0 372,000 1,000 402,000 1,000 465,000 11,000 3,335,000 129,000
0 = Less than $500.

Fair Value Disclosure

The fair value of the plan assets measured at fair value on a recurring basis as of 31 December 2012 and 2011 were reported based on the following:

		Fair Value Measurements	Fair Value Measurements	Fair Value Measurements
	31 December 2012	Level 1	Level 2	Level 3
Cash and cash equivalents	133,000 $	– $	133,000 $	– $
Common/preferred stocks	927,000	927,000	–	0
Investment funds Government or government- guaranteed securities Corporate debt securities Mortgage/asset-backed securities:	1,630,000 481,000 476,000	1,630,000 464,000 431,000	– 17,000 21,000	– – 24,000
Mortgage-backed securities	141,000	76,000	65,000	0
Collateralized mortgage obligations	12,000	0	5,000	7,000
Asset-backed securities Short-term investments	3,000 212,000	– 52,000	3,000 160,000	– –
Derivatives	0	1,000	(1,000)	0
Other asset/liabilitiesa—net	(57,000)	–	(57,000)	–
Total fair value of plan assets 0 = Less than $500.	3,958,000 $	3,581,000 $	346,000 $	31,000 $

a Incudes receivables and liabilities carried at amounts that approximate fair value.

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		Fair Value Measurements	Fair Value Measurements	Fair Value Measurements
	31 December 2011	Level 1	Level 2	Level 3
Cash and cash equivalents	70,000 $	– $	70,000 $	– $
Common/preferred stocks	889,000	889,000	–	0
Investment funds Government or government- guaranteed securities Corporate debt securities	1,431,000 490,000 405,000	1,431,000 465,000 330,000	– 12,000 59,000	– 13,000 16,000
Mortgage/asset-backed securities:
Mortgage-backed securities	140,000	109,000	30,000	1,000
Collateralized mortgage obligations	19,000	0	6,000	13,000
Asset-backed securities Short-term investments	4,000 90,000	– 70,000	– 20,000	4,000 –
Derivatives	11,000	0	11,000	0
Other asset/liabilitiesa—net	(9,000)	–	(9,000)	–
Total fair value of plan assets 0 = Less than $500.	3,540,000 $	3,294,000 $	199,000 $	47,000 $
aIncudes receivables and liabilities carried at	amounts that approximate fair value.

The fair values of the Plan investment are provided by the Plan’s global custodian from various independent pricing providers. The Plan’s investment committee and SRP investment unit meets periodically and are involved in overseeing the activities and performance of the investment portfolios. The accounting division in coordination with SRP investment unit evaluates the fair value in determining in the hierarchy level and ensuring that the valuation models are validated and is consistent from period to period. All investments including equity securities, fixed income securities and derivatives are valued using quoted market prices where available. Some prices provided by the pricing provider were valued using market observable and/or significant unobservable inputs. Equity securities include common and preferred stocks and mutual funds. Fixed income securities include government and governmentguaranteed securities, corporate obligations, asset and mortgage-backed securities, and short-term investments. Derivatives include futures, swaps and forward currency contracts.

The table below provides details of transfers between Levels 1 and 2 for the years ended 31 December 2012 and 2011:

	2012	2012	2011	2011
Investments	Level 1	Level 2	Level 1	Level 2
Government or government-
guaranteed securities
Transfers into (out of)	(9,000) $	9,000 $	31,000 $	(31,000) $
Corporate debt securities
Transfers into (out of)	35,000	(35,000)	99,000	(99,000)
Mortgaged/asset-backed securities
Transfers into (out of)	(40,000)	40,000 14,000 $	32,000	(32,000) (162,000) $
	(14,000) $		162,000 $

The inter-level transfers are attributed to the availability of market quotes.

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The following tables present the changes in the carrying amounts of the pension plan Level 3 financial assets and financial liabilities for the years ended 31 December 2012 and 2011:

Balance, 31 December 2011 Total realized/unrealized (losses)/gains in: Net increase in net assets available for benefits Purchases Sales/Maturities Settlement and others Transfers into (out of) Level 3 Balance, 31 December 2012 Total unrealized (losses)/gains included in income related to financial assets and liabilities still held at the reporting date 0 = Less than $500.		Investments	Investments
	Common/ preferred stocks 0 $ 0 – – – – 0 $ 0 $	Government or gov't.-guaranteed securities 13,000 $ 0 – (10,000) – (3,000) – $ – $	Corporate debt securities 16,000 $ 1,000 4,000 (1,000) 0 4,000 24,000 $ 1,000 $	Mortgage/ Asset-backed securities Derivatives 18,000 $ 0 $ 0 0 – – (1,000) – (4,000) – (6,000) – 7,000 $ 0 $ – $ 0 $
Balance, 31 December 2010 Total realized/unrealized (losses)/gains in: Net increase in net assets available for benefits Purchases Sales/Maturities Settlement and others Transfers into (out of) Level 3 Balance, 31 December 2011 Total unrealized (losses)/gains included in income related to financial assets and liabilities still held at the reporting date 0 = Less than $500.		Investments
	Common/ preferred stocks – $ 0 0 – – 0 $ 0 $	Government or gov't.-guaranteed securities – $ 1,000 2,000 – – 10,000 13,000 $ 1,000 $	Corporate debt securities – $ (1,000) 17,000 – – – 16,000 $ (1,000) $	Mortgage/ Asset-backed securities Derivatives – $ – $ 0 0 10,000 – – – – – 8,000 18,000 $ 0 $ 0 $ 0 $

Transfers into and out of Level 3 in 2012 are attributed to the availability of observable inputs and in 2011 are primarily the result of refining ADB’s valuation approach.

NOTE L—OTHER FAIR VALUE DISCLOSURES

As of 31 December 2012 and 2011, the Institute has no assets or liabilities measured at fair value on a non-recurring basis. See Note C for discussions relating to securities purchased under resale arrangements. In all other cases, the carrying amounts of the Institute’s assets and liabilities are considered to approximate fair values.

NOTE M—SUBSEQUENT EVENTS

The Institute has evaluated subsequent events after 31 December 2012 through 8 March 2013, the date these Financial Statements are available for issuance. As a result of this evaluation, there were no subsequent events, as defined, that require recognition or disclosure in the Institute’s Financial Statements as of 31 December 2012.

173

PAKISTAN EARTHQUAKE FUND MANAGEMENT’S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING

The management of Asian Development Bank (“ADB”) is responsible for establishing and maintaining adequate internal control over financial reporting. ADB’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles in the United States of America.

ADB’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of ADB; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles in the United States of America, and that receipts and expenditures of ADB are being made only in accordance with authorizations of management and directors of ADB; and (iii) provide reasonable assurance regarding prevention or timely detection and correction of unauthorized acquisition, use, or disposition of ADB’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 misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

ADB’s management assessed the effectiveness of ADB’s internal control over financial reporting as of 31 December 2012. In making this assessment, ADB’s management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission in Internal Control – Integrated Framework. Based on that assessment, management believes that as of 31 December 2012, ADB’s internal control over financial reporting is effective based upon the criteria established in Internal Control – Integrated Framework.

Haruhiko Kuroda President Thierry de Longuemar Vice-President (Finance and Risk Management)

Simon T. Bradbury Controller

8 March 2013

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Deloitte & Touche LLP Certified Public Accountants Unique Entity No. T08LL0721A 6 Shenton Way, Tower Two #32-00 Singapore 068809

Tel: +65 6224 8288 Fax: +65 6538 6166 www.deloitte.com

INDEPENDENT AUDITORS’ REPORT

To the Board of Directors and the Board of Governors of Asian Development Bank

We have audited management's assertion, included in the accompanying Management’s Report on Internal Control over Financial Reporting, that Asian Development Bank ("ADB") maintained effective internal control over financial reporting as of December 31, 2012, based on the criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. ADB's management is responsible for maintaining effective internal control over financial reporting and for its assertion of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on management's assertion based on our audit.

We conducted our audit in accordance with attestation standards established by the American Institute of Certified Public Accountants. 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. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

ADB’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with accounting principles generally accepted in the United States of America. ADB'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 ADB; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with accounting principles generally accepted in the United States of America, and that receipts and expenditures of ADB are being made only in accordance with authorizations of management and directors of ADB; and (3) provide reasonable assurance regarding prevention or timely detection and correction of unauthorized acquisition, use, or disposition of ADB’s assets that could have a material effect on the financial statements.

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Because of the inherent limitations of internal control over financial reporting, including the possibility of collusion or improper management override of controls, material misstatements due to error or fraud may not be prevented or detected and corrected on a timely basis. Also, projections of any evaluation of the effectiveness of the internal control over financial reporting to future periods are subject to the risk that the controls may become inadequate because of changes in conditions or that the degree of compliance with the policies or procedures may deteriorate.

In our opinion, management’s assertion that ADB maintained effective internal control over financial reporting as of December 31, 2012, is fairly stated, in all material respects, based on the criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission.

We have also audited, in accordance with auditing standards generally accepted in the United States of America, the accompanying statement of financial position of Asian Development Bank (“ADB”) – Pakistan Earthquake Fund as of December 31, 2012 and 2011 and the related statements of activities and changes in net assets, and cash flows for the years then ended and the related notes to the financial statements. Our report dated March 8, 2013 expressed an unqualified opinion on those financial statements.

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Public Accountants and Certified Public Accountants

Singapore March 8, 2013

176

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Deloitte & Touche LLP Certified Public Accountants Unique Entity No. T08LL0721A 6 Shenton Way, Tower Two #32-00 Singapore 068809

Tel: +65 6224 8288 Fax: +65 6538 6166 www.deloitte.com

INDEPENDENT AUDITORS’ REPORT

To the Board of Directors and the Board of Governors of Asian Development Bank

We have audited the accompanying financial statements of Asian Development Bank (“ADB”) – Pakistan Earthquake Fund which comprise the statement of financial position as of December 31, 2012 and 2011, and the related statements of activities and changes in net assets, and cash flows for the years then ended, 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 accounting principles generally accepted in the United States of America; 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.

An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditor’s 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.

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Opinion

In our opinion, the financial statements referred to above present fairly, in all material respects, – the financial position of ADB Pakistan Earthquake Fund as of December 31, 2012 and 2011, and the results of its operations and its cash flows for the years then ended in accordance with accounting principles generally accepted in the United States of America.

Report on Management’s Assertion on Internal Control over Financial Reporting

We have also audited, in accordance with attestation standards established by the American Institute of Certified Public Accountants, management’s assertion that ADB maintained effective internal control over financial reporting as of December 31, 2012, based on the criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated March 8, 2013 expressed an unqualified opinion on management’s assertion that ADB maintained effective internal control over financial reporting.

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Public Accountants and Certified Public Accountants

Singapore March 8, 2013

178

PEF-1

ASIAN DEVELOPMENT BANK—PAKISTAN EARTHQUAKE FUND STATEMENT OF FINANCIAL POSITION 31 December 2012 and 2011

Expressed in Thousands of United States Dollars

ASSETS DUE FROM BANKS INVESTMENTS (Notes C and G) Time deposits ACCRUED REVENUE ADVANCES FOR GRANTS	2012 699 $ 17,728 4 85	2011
		575 $ 20,791 4 2,964
TOTAL	18,516 $	24,334 $
LIABILITIES AND UNCOMMITTED BALANCES ACCOUNTS PAYABLE AND OTHER LIABILITIES (Note D) UNDISBURSED COMMITMENTS (Notes E and G) TOTAL LIABILITIES UNCOMMITTED BALANCES (PEF-2) (Note F), represented by: Unrestricted net assets	15 $ 14,074 14,089 4,427	57 $ 19,724
		19,781 4,553
TOTAL	18,516 $	24,334 $

The accompanying notes are an integral part of these financial statements (PEF-4).

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PEF-2

ASIAN DEVELOPMENT BANK—PAKISTAN EARTHQUAKE FUND STATEMENT OF ACTIVITIES AND CHANGES IN NET ASSETS For the Years Ended 31 December 2012 and 2011

Expressed in Thousands of United States Dollars

CHANGES IN UNRESTRICTED NET ASSETS REVENUE From investments (Note C) From other sources Total EXPENSES Technical assistance (Note E) Administrative and financial expenses (Note D) Total REVENUE IN EXCESS OF EXPENSES EXCHANGE LOSSES—net (DECREASE) INCREASE IN NET ASSETS NET ASSETS AT BEGINNING OF YEAR	2012 189 $ 216 405 – 128 128 277 (403) (126) 4,553	2011
		1,029 $ 142
		1,171
		(220) 295
		75
		1,096 (481)
		615 3,938
NET ASSETS AT END OF YEAR	4,427 $	4,553 $

The accompanying notes are an integral part of these financial statements (PEF-4).

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PEF-3

ASIAN DEVELOPMENT BANK—PAKISTAN EARTHQUAKE FUND STATEMENT OF CASH FLOWS For the Years Ended 31 December 2012 and 2011

Expressed in Thousands of United States Dollars

CASH FLOWS FROM OPERATING ACTIVITIES Interest on investments received Net cash received from other sources Grants and technical assistance disbursed Administrative and financial expenses paid Net Cash Used in Operating Activities CASH FLOWS FROM INVESTING ACTIVITIES Maturities of investments Purchases of investments Net Cash Provided by Investing Activities Effect of Exchange Rate Changes on Due from Banks Net Increase in Due from Banks Due from Banks at Beginning of Year Due from Banks at End of Year	2012 189 $ 215 (2,778) (169) (2,543) 592,060 (589,180) 2,880 (213) 124 575 699 $	2011
		1,081 $ 142 (9,870) (299)
		(8,946)
		678,596 (669,435)
		9,161
		(110)
		105 470
		575 $

RECONCILIATION OF (DECREASE) INCREASE IN NET ASSETS TO NET CASH USED IN OPERATING ACTIVITIES:

(Decrease) Increase in net assets (PEF-2) Adjustments to reconcile (decrease) increase in net assets to net cash used in operating activities: Change in accrued revenue Change in advances for grants Change in miscellaneous liabilities Change in undisbursed commitments Exchange losses—net Net Cash Used in Operating Activities	(126) $ 0 2,879 (42) (5,650) 396 (2,543) $	615 $ 51 4,166 (3) (14,256) 481
		(8,946) $

0 = Less than $500.

The accompanying notes are an integral part of these financial statements (PEF-4).

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PEF-4

ASIAN DEVELOPMENT BANK—PAKISTAN EARTHQUAKE FUND NOTES TO FINANCIAL STATEMENTS 31 December 2012 and 2011

NOTE A—NATURE OF OPERATIONS

The Asian Development Bank (ADB), a multilateral development financial institution, was established in 1966 with its headquarters in Manila, Philippines. ADB and its operations are governed by the Agreement Establishing the Asian Development Bank (the Charter). Its purpose is to foster economic development and co-operation in Asia and the Pacific region and to contribute to the acceleration of the process of economic development of the developing member countries (DMCs) in the region, collectively and individually. Since 1999, ADB’s corporate vision and mission has been to help DMCs reduce poverty in the region. This was reaffirmed under the long-term strategic framework for 2008-2020 (Strategy 2020). Under Strategy 2020, ADB’s corporate vision continues to be “An Asia and Pacific Free of Poverty” and its mission has been to help its DMCs reduce poverty and improve living conditions and quality of life. ADB has been pursuing its mission and vision by focusing on three complementary strategic agendas: inclusive growth, environmentally sustainable growth, and regional integration. ADB provides financial and technical assistance for projects and programs, which will contribute to achieving this purpose. These are financed through ordinary capital resources (OCR) and Special Funds.[1]

The PEF was established on 14 November 2005 in response to the special circumstances confronted by Pakistan resulting from the effects of an earthquake on 8 October 2005. The objective of the PEF is to deliver emergency grant financing promptly and effectively to Pakistan in the form of technical assistance and investment projects to support reconstruction, rehabilitation, and associated development activities.

PEF resources will be available to the Government of Pakistan and other suitable entities acceptable to the Government of Pakistan and ADB, including, where appropriate, non-government organizations.

PEF’s resources may consist of allocations from the net income of OCR and contributions from bilateral, multilateral, and individual sources.

Unless otherwise agreed by the contributors and ADB, PEF will terminate on the earlier of (i) the date three to four years from the Board approval of the PEF, or (ii) such date as the PEF funds have been fully disbursed by ADB. The PEF was terminated on 30 June 2011, but actions necessary to wind up its activities will continue after its termination.

ADB is immune from taxation pursuant to Chapter VIII, Article 56, Exemption from Taxation , of the Charter.

NOTE B—SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Presentation of the Financial Statements

The financial statements of the PEF are prepared in accordance with accounting principles generally accepted in the United States of America, and are presented on the basis of those for not-for-profit organizations.

PEF reports donors’ contributions of cash and other assets as unrestricted assets as these are made available to PEF without conditions other than for the purpose of pursuing its objectives.

1 Asian Development Fund (ADF), Technical Assistance Special Fund (TASF), Japan Special Fund (JSF), ADB Institute (ADBI), Pakistan Earthquake Fund (PEF), Regional Cooperation and Integration Fund (RCIF), Climate Change Fund (CCF), and Asia Pacific Disaster Response Fund (APDRF).

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Functional and Reporting Currency

The United States dollar is the functional and reporting currency, representing the currency of the primary economic operating environment of PEF.

Translation of Currencies

ADB adopts the use of daily exchange rates for accounting and financial reporting purposes. This allows transactions denominated in non-US dollar currencies to be translated to the reporting currency using exchange rates applicable at the time of transactions. Contributions included in the financial statements during the year are recognized at applicable exchange rates as of the respective dates of commitment. At the end of each accounting month, translations of assets, liabilities, and uncommitted balances which are denominated in non-US dollar currencies are adjusted using the applicable rates of exchange at the end of the reporting period. These translation adjustments are accounted for as exchange gains or losses and are credited or charged to operations.

Investments

All investment securities held by PEF are reported at fair value. Realized and unrealized gains and losses are included in revenue.

Interest income on time deposits is recognized as realized and reported in revenue from investments.

Contributions

The contributions from donors and the allocations from OCR net income are included in the financial statements, from the date of effectivity of the contribution agreement, and the Board of Governors’ approval, respectively.

Technical Assistance, Grants and Undisbursed Commitments

Technical assistance (TA) and grants are recognized in the financial statements when the project is approved and becomes effective. Upon completion of a TA project or cancellation of a grant, any undisbursed amount is written back as a reduction in technical assistance or grants for the year and the corresponding undisbursed commitment is eliminated accordingly.

Advances are provided from TA and grants to the executing agency or co-operating institution, for the purpose of making payments for eligible expenses. The advances are subject to liquidation and charged against undisbursed commitments. Any unutilized portion is required to be returned to the fund.

Fair Value of Financial Instruments

ASC 820 defines fair value as the price that would be received to sell an asset or paid to transfer a liability at measurement date in an orderly transaction among willing participants with an assumption that the transaction takes place in the entity’s principal market, or in the absence of principal market, in the most advantageous market for the asset or liability. The most advantageous market is the market where the sale of the asset or transfer of liability would maximize the amount received for the asset or minimize the amount paid to transfer the liability. The fair value measurement is not adjusted for transaction costs.

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continued

Fair Value Hierarchy

ASC 820 establishes a fair value hierarchy that gives the highest priority to quoted prices in active markets for identical assets or liabilities (Level 1), next priority to observable market inputs or market corroborated data (Level 2), and the lowest priority to unobservable inputs without market corroborated data (Level 3).

The fair values of ADB’s financial assets and liabilities are categorized as follows:

Level 1: fair values are based on unadjusted quoted prices for identical assets or liabilities in active markets.

Level 2: fair values are based on quoted prices for similar assets or liabilities in active markets or markets that are not active; or valuation models for which significant inputs are obtained from market-based data that are observable.

Level 3: fair values are based on prices or valuation models for which significant inputs to the model are unobservable.

Inter-level transfers from one year to another may occur due to changes in market activities affecting the availability of quoted market prices or observable market data.

ADB’s policy is to recognize transfers in and transfers out of levels as of the end of the reporting period in which they occur.

Accounting Estimates

The preparation of financial statements in conformity with generally accepted accounting principles requires management to make reasonable estimates and assumptions that affect the reported amounts of assets and liabilities and uncommitted balances as of the end of the year and the reported amounts of revenue and expenses during the year. The actual results could differ from those estimates.

Accounting and Reporting Developments

In May 2011, the Financial Accounting Standards Board issued Accounting Standards Update 2011-04, “Fair Value Measurement (Topic 820) – Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in US GAAP and IFRSs,” which provides consistency between US GAAP and International Financial Reporting Standards (IFRSs) on the definition of fair value (FV) and guidance on how to measure FV and on what to disclose about FV measurements. The amendments to the update do not require additional FV measurements and are not intended to establish valuation standards or affect valuation practices outside of financial reporting. The new guidance is effective from quarter ended 31 March 2012 for ADB. This update did not have an impact on PEF’s financial statements.

Statement of Cash Flows

For the purposes of the Statement of Cash Flows, PEF considers that its cash and cash equivalents are limited to DUE FROM BANKS, which consists of cash on hand and current accounts in banks used for operational disbursements.

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NOTE C—INVESTMENTS

The main investment management objective is to maintain security and liquidity. Subject to these parameters, ADB seeks the highest possible return on its investments. Investments are governed by the Investment Authority approved by the Board of Directors in 2006.

All investments held as of 31 December 2012 and 2011 were in time deposits.

The currency composition of the investment portfolio as of 31 December 2012 and 2011 expressed in United States dollars was as follows:

Currency Pakistan rupee United States dollar Total	2012 2011 4,546,000 $ 7,225,000 $ 13,182,000 13,566,000 17,728,000 $ 20,791,000 $

The annualized rate of return on the average investments held during the year, based on the portfolio held at the beginning and end of each month, was 1.58% (5.08% – 2011).

Fair Value Disclosure

The fair value of investments as of 31 December 2012 and 2011 was as follows:

Assets Investments Time deposits	31 December 2012 17,728,000 $	Fair Value Measurements	Fair Value Measurements
		Level 1 – $	Level 2 Level 3 17,728,000 $ – $
Assets Investments Time deposits	31 December 2011 20,791,000 $	Fair Value Measurements
		Level 1 – $	Level 2 Level 3 20,791,000 $ – $

Time deposits are reported at cost, which approximates fair value.

ADB maintains documented process and internal controls to value the investment securities. The data management unit in treasury department is responsible for providing the valuation in accordance with the business process.

NOTE D—RELATED PARTY TRANSACTIONS

The OCR and special funds resources are at all times used, committed, and invested entirely separate from each other. The administrative and operational expenses pertaining to PEF are settled regularly with OCR and the other funds. Regional technical assistance projects and programs may be combined activities financed by special and trust funds. ADB charges a service fee to cover ADB's cost for the administration, management, supervision, and operation of the PEF. The service fee is currently 2% of the amount disbursed for technical assistance and investment projects. As of 31 December 2012, $8,000 was payable to OCR ($50,000 – 2011) which is included in ACCOUNTS PAYABLE AND OTHER LIABILITIES.

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continued

NOTE E—UNDISBURSED COMMITMENTS

Undisbursed commitments are denominated in United States dollars and represent effective grants not yet disbursed and unliquidated. During 2012, no undisbursed amounts were written back ($220,000 – 2011). The fair value of undisbursed commitments approximates the amounts outstanding, because ADB expects that disbursements will substantially be made for all the projects/programs covered by the commitments.

NOTE F—UNCOMMITTED BALANCES

Uncommitted balances comprise amounts which have not been committed by ADB as of 31 December 2012 and 2011.

NOTE G—OTHER FAIR VALUE DISCLOSURES

As of 31 December 2012 and 2011, PEF has no assets or liabilities measured at fair value on a nonrecurring basis. See Notes C and E for discussions relating to investments and undisbursed commitments, respectively. In all other cases, the carrying amount of PEF’s assets and liabilities are considered to approximate fair values.

NOTE H—SUBSEQUENT EVENTS

ADB has evaluated subsequent events after 31 December 2012 through 8 March 2013, the date these Financial Statements are available for issuance. As a result of this evaluation, there are no subsequent events, as defined, that require recognition or disclosure in the PEF’s Financial Statements as of 31 December 2012.

186

REGIONAL COOPERATION AND INTEGRATION FUND MANAGEMENT’S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING

The management of Asian Development Bank (“ADB”) is responsible for establishing and maintaining adequate internal control over financial reporting. ADB’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles in the United States of America.

ADB’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of ADB; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles in the United States of America, and that receipts and expenditures of ADB are being made only in accordance with authorizations of management and directors of ADB; and (iii) provide reasonable assurance regarding prevention or timely detection and correction of unauthorized acquisition, use, or disposition of ADB’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 misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

ADB’s management assessed the effectiveness of ADB’s internal control over financial reporting as of 31 December 2012. In making this assessment, ADB’s management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission in Internal Control – Integrated Framework. Based on that assessment, management believes that as of 31 December 2012, ADB’s internal control over financial reporting is effective based upon the criteria established in Internal Control – Integrated Framework.

Haruhiko Kuroda President Thierry de Longuemar Vice-President (Finance and Risk Management)

Simon T. Bradbury Controller

8 March 2013

187

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Deloitte & Touche LLP Certified Public Accountants Unique Entity No. T08LL0721A 6 Shenton Way, Tower Two #32-00 Singapore 068809

Tel: +65 6224 8288 Fax: +65 6538 6166 www.deloitte.com

INDEPENDENT AUDITORS’ REPORT

To the Board of Directors and the Board of Governors of Asian Development Bank

We have audited management's assertion, included in the accompanying Management’s Report on Internal Control over Financial Reporting, that Asian Development Bank ("ADB") maintained effective internal control over financial reporting as of December 31, 2012, based on the criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. ADB's management is responsible for maintaining effective internal control over financial reporting and for its assertion of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on management's assertion based on our audit.

We conducted our audit in accordance with attestation standards established by the American Institute of Certified Public Accountants. 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. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

ADB’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with accounting principles generally accepted in the United States of America. ADB'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 ADB; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with accounting principles generally accepted in the United States of America, and that receipts and expenditures of ADB are being made only in accordance with authorizations of management and directors of ADB; and (3) provide reasonable assurance regarding prevention or timely detection and correction of unauthorized acquisition, use, or disposition of ADB’s assets that could have a material effect on the financial statements.

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Because of the inherent limitations of internal control over financial reporting, including the possibility of collusion or improper management override of controls, material misstatements due to error or fraud may not be prevented or detected and corrected on a timely basis. Also, projections of any evaluation of the effectiveness of the internal control over financial reporting to future periods are subject to the risk that the controls may become inadequate because of changes in conditions or that the degree of compliance with the policies or procedures may deteriorate.

In our opinion, management’s assertion that ADB maintained effective internal control over financial reporting as of December 31, 2012, is fairly stated, in all material respects, based on the criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission.

We have also audited, in accordance with auditing standards generally accepted in the United States of America, the accompanying statement of financial position of Asian Development Bank (“ADB”) – Regional Cooperation and Integration Fund as of December 31, 2012 and 2011 and the related statements of activities and changes in net assets, and cash flows for the years then ended and the related notes to the financial statements. Our report dated March 8, 2013 expressed an unqualified opinion on those financial statements.

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Public Accountants and Certified Public Accountants

Singapore March 8, 2013

189

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Deloitte & Touche LLP Certified Public Accountants Unique Entity No. T08LL0721A 6 Shenton Way, Tower Two #32-00 Singapore 068809

Tel: +65 6224 8288 Fax: +65 6538 6166 www.deloitte.com

INDEPENDENT AUDITORS’ REPORT

To the Board of Directors and the Board of Governors of Asian Development Bank

We have audited the accompanying financial statements of Asian Development Bank (“ADB”) – Regional Cooperation and Integration Fund which comprise the statement of financial position as of December 31, 2012 and 2011, and the related statements of activities and changes in net assets, and cash flows for the years then ended, 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 accounting principles generally accepted in the United States of America; 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.

An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditor’s 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.

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Opinion

In our opinion, the financial statements referred to above present fairly, in all material respects, – the financial position of ADB Regional Cooperation and Integration Fund as of December 31, 2012 and 2011, and the results of its operations and its cash flows for the years then ended in accordance with accounting principles generally accepted in the United States of America.

Report on Management’s Assertion on Internal Control over Financial Reporting

We have also audited, in accordance with attestation standards established by the American Institute of Certified Public Accountants, management’s assertion that ADB maintained effective internal control over financial reporting as of December 31, 2012, based on the criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated March 8, 2013 expressed an unqualified opinion on management’s assertion that ADB maintained effective internal control over financial reporting.

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Public Accountants and Certified Public Accountants

Singapore March 8, 2013

191

RCIF-1

ASIAN DEVELOPMENT BANK—REGIONAL COOPERATION AND INTEGRATION FUND

STATEMENT OF FINANCIAL POSITION 31 December 2012 and 2011

Expressed in Thousands of United States Dollars

ASSETS DUE FROM BANKS INVESTMENTS (Notes C and G) Time deposits ACCRUED REVENUE ADVANCES FOR GRANTS AND OTHER ASSETS (Note D)	2012 251 $ 17,619 1 1,798	2011
		179 $ 26,083 1 1,946
TOTAL	19,669 $	28,209 $
LIABILITIES AND UNCOMMITTED BALANCES ACCOUNTS PAYABLE AND OTHER LIABILITIES (Note D) UNDISBURSED COMMITMENTS (Notes E and G) TOTAL LIABILITIES UNCOMMITTED BALANCES (RCIF-2) (Note F), represented by: Unrestricted net assets	61 $ 17,957 18,018 1,651	84 $ 23,982
		24,066 4,143
TOTAL	19,669 $	28,209 $

The accompanying notes are an integral part of these financial statements (RCIF-4).

192

RCIF-2

ASIAN DEVELOPMENT BANK—REGIONAL COOPERATION AND INTEGRATION FUND

STATEMENT OF ACTIVITIES AND CHANGES IN NET ASSETS For the Years Ended 31 December 2012 and 2011

Expressed in Thousands of United States Dollars

CHANGES IN UNRESTRICTED NET ASSETS REVENUE From investments (Note C) From other sources Total EXPENSES Technical assistance—net (Note E) Administrative and financial expenses (Note D) Total REVENUE LESS THAN EXPENSES EXCHANGE LOSSES—net DECREASE IN NET ASSETS NET ASSETS AT BEGINNING OF YEAR	2012 36 $ 0 36 2,103 421 2,524 (2,488) (4) (2,492) 4,143	2011
		60 $ 0
		60
		5,725 571
		6,296
		(6,236) (3)
		(6,239) 10,382
NET ASSETS AT END OF YEAR	1,651 $	4,143 $

0 = Less than $500.

The accompanying notes are an integral part of these financial statements (RCIF-4).

193

RCIF-3

ASIAN DEVELOPMENT BANK—REGIONAL COOPERATION AND INTEGRATION FUND

STATEMENT OF CASH FLOWS For the Years Ended 31 December 2012 and 2011

Expressed in Thousands of United States Dollars

CASH FLOWS FROM OPERATING ACTIVITIES Interest on investments received Cash received from other sources Technical assistance disbursed Administrative and financial expenses paid Net Cash Used in Operating Activities CASH FLOWS FROM INVESTING ACTIVITIES Maturities of investments Purchases of investments Net Cash Provided by Investing Activities Net Increase in Due From Banks Due from Banks at Beginning of Year Due from Banks at End of Year RECONCILIATION OF DECREASE IN NET ASSETS TO NET CASH USED IN OPERATING ACTIVITIES: Decrease in net assets (RCIF-2) Adjustments to reconcile decrease in net assets to net cash used in operating activities: Change in accrued revenue Change in accrued expenses Change in interfund receivables Change in interfund payables Change in advances for grants Change in undisbursed commitments Exchange losses—net Net Cash Used in Operating Activities	2012 36 $ 0 (7,985) (443) (8,392) 1,028,408 (1,019,944) 8,464 72 179 251 $ (2,492) $ 0 0 (14) (24) 161 (6,025) 2 (8,392) $	2011
		63 $ 0 (10,811) (548)
		(11,296)
		936,673 (925,335)
		11,338
		42 137
		179 $
		(6,239) $ 2 0 44 29 275 (5,410) 3
		(11,296) $

0 = Less than $500.

The accompanying notes are an integral part of these financial statements (RCIF-4).

194

RCIF-4

ASIAN DEVELOPMENT BANK—REGIONAL COOPERATION AND INTEGRATION FUND NOTES TO FINANCIAL STATEMENTS 31 December 2012 and 2011

NOTE A—NATURE OF OPERATIONS

The Asian Development Bank (ADB), a multilateral development financial institution, was established in 1966 with its headquarters in Manila, Philippines. ADB and its operations are governed by the Agreement Establishing the Asian Development Bank (the Charter). Its purpose is to foster economic development and co-operation in Asia and the Pacific region and to contribute to the acceleration of the process of economic development of the developing member countries (DMCs) in the region, collectively and individually. Since 1999, ADB’s corporate vision and mission has been to help DMCs reduce poverty in the region. This was reaffirmed under the long-term strategic framework for 2008-2020 (Strategy 2020). Under Strategy 2020, ADB’s corporate vision continues to be “An Asia and Pacific Free of Poverty” and its mission has been to help its DMCs reduce poverty and improve living conditions and quality of life. ADB has been pursuing its mission and vision by focusing on three complementary strategic agendas: inclusive growth, environmentally sustainable growth, and regional integration. ADB provides financial and technical assistance for projects and programs, which will contribute to achieving this purpose. These are financed through ordinary capital resources (OCR) and Special Funds.[1]

The RCIF, together with the Regional Cooperation and Integration (RCI) Trust Funds, was established on 26 February 2007 under the “umbrella” of Regional Cooperation and Integration Financing Partnership Facility (RCIFPF), in response to the increasing demand for regional cooperation and integration activities among ADB’s member countries in Asia and the Pacific. Its main objective is to enhance regional cooperation and integration in Asia and the Pacific by facilitating the pooling and provision of additional financial and knowledge resources to support RCI activities.

Financial assistance will be provided in the form of untied grants for technical assistance (TA), including advisory, project preparatory, and regional TA.

RCIF’s resources may consist of contributions from ADB and other bilateral, multilateral, and individual sources, including companies and foundations.

ADB is immune from taxation pursuant to Chapter VIII, Article 56, Exemption from Taxation , of the Charter.

NOTE B—SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Presentation of the Financial Statements

The financial statements of the RCIF are prepared in accordance with accounting principles generally accepted in the United States of America (US GAAP), and are presented on the basis of those for not-forprofit organizations.

RCIF reports donors’ contributions of cash and other assets as unrestricted assets as these are made available to RCIF without conditions other than for the purpose of pursuing its objectives.

Functional and Reporting Currency

The United States dollar is the functional and reporting currency, representing the currency of the primary economic operating environment of RCIF.

1 Asian Development Fund (ADF), Technical Assistance Special Fund (TASF), Japan Special Fund (JSF), ADB Institute (ADBI), Pakistan Earthquake Fund (PEF), Regional Cooperation and Integration Fund (RCIF), Climate Change Fund (CCF), and Asia Pacific Disaster Response Fund (APDRF).

195

RCIF-4

continued

Translation of Currencies

ADB adopts the use of daily exchange rates for accounting and financial reporting purposes. This allows transactions denominated in non-US dollar currencies to be translated to the reporting currency using exchange rates applicable at the time of transactions. Contributions included in the financial statements during the year are recognized at applicable exchange rates as of the respective dates of commitment. At the end of each accounting month, translations of assets, liabilities, and uncommitted balances which are denominated in non-US dollar currencies are adjusted using the applicable rates of exchange at the end of the reporting period. These translation adjustments are accounted for as exchange gains or losses and are credited or charged to operations.

Investments

All investment securities held by RCIF are reported at fair value. Realized and unrealized gains and losses are included in revenue.

Interest income on time deposits is recognized as realized and reported in revenue from investments.

Technical Assistance, Grants and Undisbursed Commitments

Technical assistance (TA) and grants are recognized in the financial statements when the project is approved and becomes effective. Upon completion of the TA project or cancellation of a grant, any undisbursed amount is written back as a reduction in TA or grants for the year and the corresponding undisbursed commitment is eliminated accordingly.

Advances are provided from TA and grants to the executing agency or co-operating institution, for the purpose of making payments for eligible expenses. The advances are subject to liquidation and charged against undisbursed commitments. Any unutilized portion is required to be returned to the fund. These are included in ADVANCES FOR GRANTS AND OTHER ASSETS.

Fair Value of Financial Instruments

ASC 820 defines fair value as the price that would be received to sell an asset or paid to transfer a liability at measurement date in an orderly transaction among willing participants with an assumption that the transaction takes place in the entity’s principal market, or in the absence of principal market, in the most advantageous market for the asset or liability. The most advantageous market is the market where the sale of the asset or transfer of liability would maximize the amount received for the asset or minimize the amount paid to transfer the liability. The fair value measurement is not adjusted for transaction costs.

Fair Value Hierarchy

ASC 820 establishes a fair value hierarchy that gives the highest priority to quoted prices in active markets for identical assets or liabilities (Level 1), next priority to observable market inputs or market corroborated data (Level 2), and the lowest priority to unobservable inputs without market corroborated data (Level 3).

The fair values of ADB’s financial assets and liabilities are categorized as follows:

Level 1: fair values are based on unadjusted quoted prices for identical assets or liabilities in active markets.

Level 2: fair values are based on quoted prices for similar assets or liabilities in active markets or markets that are not active; or valuation models for which significant inputs are obtained from market-based data that are observable.

Level 3: fair values are based on prices or valuation models for which significant inputs to the model are unobservable.

196

RCIF-4

continued

Inter-level transfers from one year to another may occur due to changes in market activities affecting the availability of quoted market prices or observable market data.

ADB’s policy is to recognize transfers in and transfers out of levels as of the end of the reporting period in which they occur.

Accounting Estimates

The preparation of financial statements in conformity with generally accepted accounting principles requires management to make reasonable estimates and assumptions that affect the reported amounts of assets and liabilities and uncommitted balances as of the end of the year and the reported amounts of revenue and expenses during the year. The actual results could differ from those estimates.

Accounting and Reporting Developments

In May 2011, the Financial Accounting Standards Board issued Accounting Standards Update 2011-04, “Fair Value Measurement (Topic 820) – Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in US GAAP and IFRSs,” which provides consistency between US GAAP and International Financial Reporting Standards (IFRSs) on the definition of fair value (FV) and guidance on how to measure FV and on what to disclose about FV measurements. The amendments to the update do not require additional FV measurements and are not intended to establish valuation standards or affect valuation practices outside of financial reporting. The new guidance is effective from quarter ended 31 March 2012 for ADB. This update did not have an impact on RCIF’s financial statements.

Statement of Cash Flows

For the purposes of the Statement of Cash Flows, RCIF considers that its cash and cash equivalents are limited to DUE FROM BANKS, which consists of cash on hand and current accounts in banks used for operational disbursements.

NOTE C—INVESTMENTS

The main investment management objective is to maintain security and liquidity. Subject to these parameters, ADB seeks the highest possible return on its investments. Investments are governed by the Investment Authority approved by the Board of Directors in 2006.

All investments held as of 31 December 2012 and 2011 were in time deposits.

The annualized rate of return on the average investments held during the period ended 31 December 2012, based on the portfolio held at the beginning and end of each month, was 0.18% (0.20% – 2011).

Fair Value Disclosure

The fair value of investments as of 31 December 2012 and 2011 was as follows:

Assets Investments Time deposits	31 December 2012 17,619,000 $	Fair Value Measurements	Fair Value Measurements
		Level 1 – $	Level 2 Level 3 17,619,000 $ – $

197

RCIF-4

continued

Assets Investments Time deposits	31 December 2011 26,083,000 $	Fair Value Measurements	Fair Value Measurements
		Level 1 – $	Level 2 Level 3 26,083,000 $ – $

Time deposits are reported at cost, which approximates fair value.

ADB maintains documented process and internal controls to value the investment securities. The data management unit in treasury department is responsible for providing the valuation in accordance with the business process.

NOTE D—RELATED PARTY TRANSACTIONS

The OCR and special funds resources are at all times used, committed, and invested entirely separate from each other. The administrative and operational expenses pertaining to RCIF are settled regularly with OCR and the other funds. Regional technical assistance projects and programs may be combined activities financed by special and trust funds. ADB charges a service fee to cover ADB’s incremental cost for the administration, management, supervision and operation of the RCIF and RCI Trust Fund, a trust fund administered by ADB. The service fee is currently 5% of the amount disbursed for technical assistance and 2% of the amount disbursed for grant components of investment projects.

The interfund account balances included in ADVANCES FOR GRANTS AND OTHER ASSETS and ACCOUNTS PAYABLE AND OTHER LIABILITIES are as follows:

Receivable from: Technical Assistance Special Fund Japan Special Fund Climate Change Fund Total Payable to: Ordinary capital resources	2012 2011 53,000 $ 48,000 $ 7,000 – 2,000 – 62,000 $ 48,000 $ 53,000 $ 76,000 $

NOTE E—UNDISBURSED COMMITMENTS

Undisbursed commitments are denominated in United States dollars and represent effective technical assistance and grants not yet disbursed and unliquidated. During 2012, $322,000 ($275,000 – 2011) representing completed and canceled TA projects was written back as a reduction in technical assistance of the period and the corresponding undisbursed commitment was eliminated. The fair value of undisbursed commitments approximates the amounts outstanding, because ADB expects that disbursements will substantially be made for all the projects/programs covered by the commitments.

NOTE F—UNCOMMITTED BALANCES

Uncommitted balances comprise amounts which have not been committed by ADB as of 31 December 2012 and 2011.

198

RCIF-4

continued

NOTE G—OTHER FAIR VALUE DISCLOSURES

As of 31 December 2012 and 2011, RCIF has no assets or liabilities measured at fair value on a nonrecurring basis. See Notes C and E for discussions relating to investments and undisbursed commitments, respectively. In all other cases, the carrying amount of RCIF’s assets and liabilities are considered to approximate fair values.

NOTE H—SUBSEQUENT EVENTS

ADB has evaluated subsequent events after 31 December 2012 through 8 March 2013, the date these Financial Statements are available for issuance. As a result of this evaluation, there are no subsequent events, as defined, that require recognition or disclosure in the RCIF’s Financial Statements as of 31 December 2012.

199

CLIMATE CHANGE FUND MANAGEMENT’S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING

The management of Asian Development Bank (“ADB”) is responsible for establishing and maintaining adequate internal control over financial reporting. ADB’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles in the United States of America.

ADB’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of ADB; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles in the United States of America, and that receipts and expenditures of ADB are being made only in accordance with authorizations of management and directors of ADB; and (iii) provide reasonable assurance regarding prevention or timely detection and correction of unauthorized acquisition, use, or disposition of ADB’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 misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

ADB’s management assessed the effectiveness of ADB’s internal control over financial reporting as of 31 December 2012. In making this assessment, ADB’s management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission in Internal Control – Integrated Framework. Based on that assessment, management believes that as of 31 December 2012, ADB’s internal control over financial reporting is effective based upon the criteria established in Internal Control – Integrated Framework.

Haruhiko Kuroda President Thierry de Longuemar Vice-President (Finance and Risk Management)

Simon T. Bradbury Controller

8 March 2013

200

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Deloitte & Touche LLP Certified Public Accountants Unique Entity No. T08LL0721A 6 Shenton Way, Tower Two #32-00 Singapore 068809

Tel: +65 6224 8288 Fax: +65 6538 6166 www.deloitte.com

INDEPENDENT AUDITORS’ REPORT

To the Board of Directors and the Board of Governors of Asian Development Bank

We have audited management's assertion, included in the accompanying Management’s Report on Internal Control over Financial Reporting, that Asian Development Bank ("ADB") maintained effective internal control over financial reporting as of December 31, 2012, based on the criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. ADB's management is responsible for maintaining effective internal control over financial reporting and for its assertion of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on management's assertion based on our audit.

We conducted our audit in accordance with attestation standards established by the American Institute of Certified Public Accountants. 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. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

ADB’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with accounting principles generally accepted in the United States of America. ADB'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 ADB; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with accounting principles generally accepted in the United States of America, and that receipts and expenditures of ADB are being made only in accordance with authorizations of management and directors of ADB; and (3) provide reasonable assurance regarding prevention or timely detection and correction of unauthorized acquisition, use, or disposition of ADB’s assets that could have a material effect on the financial statements.

201

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Because of the inherent limitations of internal control over financial reporting, including the possibility of collusion or improper management override of controls, material misstatements due to error or fraud may not be prevented or detected and corrected on a timely basis. Also, projections of any evaluation of the effectiveness of the internal control over financial reporting to future periods are subject to the risk that the controls may become inadequate because of changes in conditions or that the degree of compliance with the policies or procedures may deteriorate.

In our opinion, management’s assertion that ADB maintained effective internal control over financial reporting as of December 31, 2012, is fairly stated, in all material respects, based on the criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission.

We have also audited, in accordance with auditing standards generally accepted in the United States of America, the accompanying statement of financial position of Asian Development Bank (“ADB”) – Climate Change Fund as of December 31, 2012 and 2011 and the related statements of activities and changes in net assets, and cash flows for the years then ended and the related notes to the financial statements. Our report dated March 8, 2013 expressed an unqualified opinion on those financial statements.

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Public Accountants and Certified Public Accountants

Singapore March 8, 2013

202

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Deloitte & Touche LLP Certified Public Accountants Unique Entity No. T08LL0721A 6 Shenton Way, Tower Two #32-00 Singapore 068809

Tel: +65 6224 8288 Fax: +65 6538 6166 www.deloitte.com

INDEPENDENT AUDITORS’ REPORT

To the Board of Directors and the Board of Governors of Asian Development Bank

We have audited the accompanying financial statements of Asian Development Bank (“ADB”) – Climate Change Fund which comprise the statement of financial position as of December 31, 2012 and 2011, and the related statements of activities and changes in net assets, and cash flows for the years then ended, 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 accounting principles generally accepted in the United States of America; 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.

An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditor’s 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.

203

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Opinion

In our opinion, the financial statements referred to above present fairly, in all material respects, – the financial position of ADB Climate Change Fund as of December 31, 2012 and 2011, and the results of its operations and its cash flows for the years then ended in accordance with accounting principles generally accepted in the United States of America.

Report on Management’s Assertion on Internal Control over Financial Reporting

We have also audited, in accordance with attestation standards established by the American Institute of Certified Public Accountants, management’s assertion that ADB maintained effective internal control over financial reporting as of December 31, 2012, based on the criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated March 8, 2013 expressed an unqualified opinion on management’s assertion that ADB maintained effective internal control over financial reporting.

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Public Accountants and Certified Public Accountants

Singapore March 8, 2013

204

CCF-1

ASIAN DEVELOPMENT BANK—CLIMATE CHANGE FUND

STATEMENT OF FINANCIAL POSITION 31 December 2012 and 2011

Expressed in Thousands of United States Dollars

ASSETS DUE FROM BANKS INVESTMENTS (Notes C and G) Time deposits ACCRUED REVENUE ADVANCES FOR GRANTS AND OTHER ASSETS (Note D)	2012 276 $ 32,685 2 1,496	2011
		164 $ 37,724 2 1,327
TOTAL	34,459 $	39,217 $
LIABILITIES AND UNCOMMITTED BALANCES ACCOUNTS PAYABLE AND OTHER LIABILITIES (Note D) UNDISBURSED COMMITMENTS (Notes E and G) TOTAL LIABILITIES UNCOMMITTED BALANCES (CCF-2) (Note F), represented by: Unrestricted net assets	69 $ 26,506 26,575 7,884	14 $ 24,961
		24,975 14,242
TOTAL	34,459 $	39,217 $

The accompanying notes are an integral part of these financial statements (CCF-4).

205

CCF-2

ASIAN DEVELOPMENT BANK—CLIMATE CHANGE FUND STATEMENT OF ACTIVITIES AND CHANGES IN NET ASSETS For the Years Ended 31 December 2012 and 2011

Expressed in Thousands of United States Dollars

CHANGES IN UNRESTRICTED NET ASSETS REVENUE From investments (Note C) From other sources Total EXPENSES Technical assistance and grants—net (Note E) Administrative and financial expenses (Note D) Total REVENUE LESS THAN EXPENSES EXCHANGE GAINS (LOSSES)—net DECREASE IN NET ASSETS NET ASSETS AT BEGINNING OF YEAR	2012 61 $ – 61 6,016 412 6,428 (6,367) 9 (6,358) 14,242	2011
		77 $ 0
		77
		4,603 367
		4,970
		(4,893) (1)
		(4,894) 19,136
NET ASSETS AT END OF YEAR	7,884 $	14,242 $

0 = Less than $500.

The accompanying notes are an integral part of these financial statements (CCF-4).

206

CCF-3

ASIAN DEVELOPMENT BANK—CLIMATE CHANGE FUND STATEMENT OF CASH FLOWS For the Years Ended 31 December 2012 and 2011

Expressed in Thousands of United States Dollars

CASH FLOWS FROM OPERATING ACTIVITIES Interest on investments received Cash received from other sources Technical assistance and grants disbursed Administrative and financial expenses paid Net Cash Used in Operating Activities CASH FLOWS FROM INVESTING ACTIVITIES Maturities of investments Purchases of investments Net Cash Provided by Investing Activities Net Increase (Decrease) in Due From Banks Due from Banks at Beginning of Year Due from Banks at End of Year RECONCILIATION OF DECREASE IN NET ASSETS TO NET CASH USED IN OPERATING ACTIVITIES: Decrease in net assets (CCF-2) Adjustments to reconcile decrease in net assets to net cash used in operating activities: Change in accrued revenue Change in miscellaneous assets Change in miscellaneous liabilities Change in advances for technical assistance/grants Change in undisbursed commitments Exchange (gains) losses—net Net Cash Used in Operating Activities	2012 60 $ – (4,670) (317) (4,927) 1,726,721 (1,721,682) 5,039 112 164 276 $ (6,358) $ – 24 54 (191) 1,545 (1) (4,927) $	2011
		79 $ 0 (5,400) (412)
		(5,733)
		1,205,923 (1,200,201)
		5,722
		(11) 175
		164 $
		(4,894) $ 1 (23) (45) (156) (617) 1
		(5,733) $

0 = Less than $500.

The accompanying notes are an integral part of these financial statements (CCF-4).

207

CCF-4

ASIAN DEVELOPMENT BANK—CLIMATE CHANGE FUND NOTES TO FINANCIAL STATEMENTS 31 December 2012 and 2011

NOTE A—NATURE OF OPERATIONS

The Asian Development Bank (ADB), a multilateral development financial institution, was established in 1966 with its headquarters in Manila, Philippines. ADB and its operations are governed by the Agreement Establishing the Asian Development Bank (the Charter). Its purpose is to foster economic development and co-operation in Asia and the Pacific region and to contribute to the acceleration of the process of economic development of the developing member countries (DMCs) in the region, collectively and individually. Since 1999, ADB’s corporate vision and mission has been to help DMCs reduce poverty in the region. This was reaffirmed under the long-term strategic framework for 2008-2020 (Strategy 2020). Under Strategy 2020, ADB’s corporate vision continues to be “An Asia and Pacific Free of Poverty” and its mission has been to help its DMCs reduce poverty and improve living conditions and quality of life. ADB has been pursuing its mission and vision by focusing on three complementary strategic agendas: inclusive growth, environmentally sustainable growth, and regional integration. ADB provides financial and technical assistance for projects and programs, which will contribute to achieving this purpose. These are financed through ordinary capital resources (OCR) and Special Funds.[1]

The CCF was established on 7 April 2008 to facilitate greater investments in DMCs to address the causes and consequences of climate change alongside ADB’s own assistance in various related sectors. The CCF will be a key mechanism to pool resources within ADB to address climate change through (i) technical assistance (TA), (ii) investment components for both private and public sector projects, and (iii) any other form of cooperation that partners and ADB may agree upon for a defined program of activities.

Financial assistance will be provided in the form of untied grants for components of investment projects, for advisory, project preparatory, and regional TA; as well as for any other activities that may be agreed between external contributors and ADB.

CCF’s resources may consist of contributions from ADB and other bilateral, multilateral, and individual sources, including companies and foundations.

ADB is immune from taxation pursuant to Chapter VIII, Article 56, Exemption from Taxation , of the Charter.

NOTE B—SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Presentation of the Financial Statements

The financial statements of the CCF are prepared in accordance with accounting principles generally accepted in the United States of America (US GAAP), and are presented on the basis of those for not-forprofit organizations.

CCF reports donors’ contributions of cash and other assets as unrestricted assets as these are made available to CCF without conditions other than for the purpose of pursuing its objectives.

Functional and Reporting Currency

The United States dollar is the functional and reporting currency, representing the currency of the primary economic operating environment of CCF.

1 Asian Development Fund (ADF), Technical Assistance Special Fund (TASF), Japan Special Fund (JSF), ADB Institute (ADBI), Pakistan Earthquake Fund (PEF), Regional Cooperation and Integration Fund (RCIF), Climate Change Fund (CCF), and Asia Pacific Disaster Response Fund (APDRF).

208

CCF-4

continued

Translation of Currencies

ADB adopts the use of daily exchange rates for accounting and financial reporting purposes. This allows transactions denominated in non-US dollar currencies to be translated to the reporting currency using exchange rates applicable at the time of transactions. Contributions included in the financial statements during the year are recognized at applicable exchange rates as of the respective dates of commitment. At the end of each accounting month, translations of assets, liabilities, and uncommitted balances which are denominated in non-US dollar currencies are adjusted using the applicable rates of exchange at the end of the reporting period. These translation adjustments are accounted for as exchange gains or losses and are credited or charged to operations.

Investments

All investment securities held by CCF are reported at fair value. Realized and unrealized gains and losses are included in revenue.

Interest income on time deposits is recognized as realized and reported in revenue from investments.

Contributions

The contributions from donors and the allocations from net income of OCR are included in the financial statements, from the date of effectivity of the contributions agreement, and the Board of Governors’ approval, respectively.

Technical Assistance, Grants and Undisbursed Commitments

Technical assistance and grants are recognized in the financial statements when the project is approved and becomes effective. Upon completion of the TA project or cancellation of a grant, any undisbursed amount is written back as a reduction in TA or grants for the year and the corresponding undisbursed commitment is eliminated accordingly.

Advances are provided from TA and grants to the executing agency or co-operating institution, for the purpose of making payments for eligible expenses. The advances are subject to liquidation and charged against undisbursed commitments. Any unutilized portion is required to be returned to the fund.

Fair Value of Financial Instruments

ASC 820 defines fair value as the price that would be received to sell an asset or paid to transfer a liability at measurement date in an orderly transaction among willing participants with an assumption that the transaction takes place in the entity’s principal market, or in the absence of principal market, in the most advantageous market for the asset or liability. The most advantageous market is the market where the sale of the asset or transfer of liability would maximize the amount received for the asset or minimize the amount paid to transfer the liability. The fair value measurement is not adjusted for transaction costs.

Fair Value Hierarchy

ASC 820 establishes a fair value hierarchy that gives the highest priority to quoted prices in active markets for identical assets or liabilities (Level 1), next priority to observable market inputs or market corroborated data (Level 2), and the lowest priority to unobservable inputs without market corroborated data (Level 3).

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CCF-4

continued

The fair values of ADB’s financial assets and liabilities are categorized as follows:

Level 1: fair values are based on unadjusted quoted prices for identical assets or liabilities in active markets.

Level 2: fair values are based on quoted prices for similar assets or liabilities in active markets or markets that are not active; or valuation models for which significant inputs are obtained from market-based data that are observable.

Level 3: fair values are based on prices or valuation models for which significant inputs to the model are unobservable.

Inter-level transfers from one year to another may occur due to changes in market activities affecting the availability of quoted market prices or observable market data.

ADB’s policy is to recognize transfers in and transfers out of levels as of the end of the reporting period in which they occur.

Accounting Estimates

The preparation of financial statements in conformity with generally accepted accounting principles requires management to make reasonable estimates and assumptions that affect the reported amounts of assets and liabilities and uncommitted balances as of the end of the year and the reported amounts of revenue and expenses during the year. The actual results could differ from those estimates.

Accounting and Reporting Developments

In May 2011, the Financial Accounting Standards Board issued Accounting Standards Update 2011-04, “Fair Value Measurement (Topic 820) – Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in US GAAP and IFRSs,” which provides consistency between US GAAP and International Financial Reporting Standards (IFRSs) on the definition of fair value (FV) and guidance on how to measure FV and on what to disclose about FV measurements. The amendments to the update do not require additional FV measurements and are not intended to establish valuation standards or affect valuation practices outside of financial reporting. The new guidance is effective from quarter ended 31 March 2012 for ADB. This update did not have an impact on CCF’s financial statements.

Statement of Cash Flows

For the purposes of the Statement of Cash Flows, CCF considers that its cash and cash equivalents are limited to DUE FROM BANKS, which consists of cash on hand and current accounts in banks used for operational disbursements.

NOTE C—INVESTMENTS

The main investment management objective is to maintain security and liquidity. Subject to these parameters, ADB seeks the highest possible return on its investments. Investments are governed by the Investment Authority approved by the Board of Directors in 2006.

All investments held as of 31 December 2012 and 2011 were in time deposits.

The annualized rate of return on the average investments held during the period ended 31 December 2012, based on the portfolio held at the beginning and end of each month, was 0.18% (0.20% – 2011).

210

CCF-4

continued

Fair Value Disclosure

The fair value of investments as of 31 December 2012 and 2011 was as follows:

Assets Investments Time deposits	31 December 2012 32,685,000 $	Fair Value Measurements	Fair Value Measurements
		Level 1 – $	Level 2 Level 3 32,685,000 $ – $
Assets Investments Time deposits	31 December 2011 37,724,000 $	Fair Value Measurements
		Level 1 – $	Level 2 Level 3 37,724,000 $ – $

Time deposits are reported at cost, which approximates fair value.

ADB maintains documented process and internal controls to value the investment securities. The data management unit in treasury department is responsible for providing the valuation in accordance with the business process.

NOTE D—RELATED PARTY TRANSACTIONS

The OCR and special funds resources are at all times used, committed, and invested entirely separate from each other. The administrative and operational expenses pertaining to CCF are settled regularly with OCR and the other funds. Regional technical assistance projects and programs may be combined activities financed by special and trust funds. ADB charges a service fee to cover ADB’s incremental cost for the administration, management, supervision and operation of the CCF. The service fee is currently 5% of the amount disbursed for technical assistance and 2% of the amount disbursed for grant components of investment projects.

The interfund account balances included in ADVANCES FOR GRANTS AND OTHER ASSETS and ACCOUNTS PAYABLE AND OTHER LIABILITIES are as follows:

Receivable from: Technical Assistance Special Fund Agency Trust Funds Total Payable to: Ordinary capital resources Technical Assistance Special Fund Regional Cooperation and Integration Fund Total	2012 – – – $ 27,000 $ 33,000 2,000 62,000 $	2011
		11,000 13,000
		24,000 $
		8,000 $ – –
		8,000 $

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CCF-4

continued

NOTE E—UNDISBURSED COMMITMENTS

Undisbursed commitments are denominated in United States dollars and represent TA not yet disbursed and unliquidated. During 2012, $1,006,000 ($447,000 – 2011) representing completed and canceled TA projects were written back as a reduction in technical assistance of the period and the corresponding undisbursed commitment was eliminated. The fair value of undisbursed commitments approximates the amounts outstanding, because ADB expects that disbursements will substantially be made for all the projects/programs covered by the commitments.

NOTE F—CONTRIBUTIONS AND UNCOMMITTED BALANCES

No contributions were received during 2012 and 2011.

Uncommitted balances comprise amounts which have not been committed by ADB as of 31 December 2012 and 2011.

NOTE G—OTHER FAIR VALUE DISCLOSURES

As of 31 December 2012 and 2011, CCF has no assets or liabilities measured at fair value on a nonrecurring basis. See Notes C and E for discussions relating to investments and undisbursed commitments, respectively. In all other cases, the carrying amount of CCF’s assets and liabilities are considered to approximate fair values.

NOTE H—SUBSEQUENT EVENTS

ADB has evaluated subsequent events after 31 December 2012 through 8 March 2013, the date these Financial Statements are available for issuance. As a result of this evaluation, there are no subsequent events, as defined, that require recognition or disclosure in the CCF’s Financial Statements as of 31 December 2012.

212

ASIA PACIFIC DISASTER RESPONSE FUND MANAGEMENT’S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING

The management of Asian Development Bank (“ADB”) is responsible for establishing and maintaining adequate internal control over financial reporting. ADB’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles in the United States of America.

ADB’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of ADB; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles in the United States of America, and that receipts and expenditures of ADB are being made only in accordance with authorizations of management and directors of ADB; and (iii) provide reasonable assurance regarding prevention or timely detection and correction of unauthorized acquisition, use, or disposition of ADB’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 misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

ADB’s management assessed the effectiveness of ADB’s internal control over financial reporting as of 31 December 2012. In making this assessment, ADB’s management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission in Internal Control – Integrated Framework. Based on that assessment, management believes that as of 31 December 2012, ADB’s internal control over financial reporting is effective based upon the criteria established in Internal Control – Integrated Framework.

Haruhiko Kuroda President Thierry de Longuemar Vice-President (Finance and Risk Management)

Simon T. Bradbury Controller

8 March 2013

213

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Deloitte & Touche LLP Certified Public Accountants Unique Entity No. T08LL0721A 6 Shenton Way, Tower Two #32-00 Singapore 068809

Tel: +65 6224 8288 Fax: +65 6538 6166 www.deloitte.com

INDEPENDENT AUDITORS’ REPORT

To the Board of Directors and the Board of Governors of Asian Development Bank

We have audited management's assertion, included in the accompanying Management’s Report on Internal Control over Financial Reporting, that Asian Development Bank ("ADB") maintained effective internal control over financial reporting as of December 31, 2012, based on the criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. ADB's management is responsible for maintaining effective internal control over financial reporting and for its assertion of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on management's assertion based on our audit.

We conducted our audit in accordance with attestation standards established by the American Institute of Certified Public Accountants. 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. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

ADB’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with accounting principles generally accepted in the United States of America. ADB'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 ADB; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with accounting principles generally accepted in the United States of America, and that receipts and expenditures of ADB are being made only in accordance with authorizations of management and directors of ADB; and (3) provide reasonable assurance regarding prevention or timely detection and correction of unauthorized acquisition, use, or disposition of ADB’s assets that could have a material effect on the financial statements.

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Because of the inherent limitations of internal control over financial reporting, including the possibility of collusion or improper management override of controls, material misstatements due to error or fraud may not be prevented or detected and corrected on a timely basis. Also, projections of any evaluation of the effectiveness of the internal control over financial reporting to future periods are subject to the risk that the controls may become inadequate because of changes in conditions or that the degree of compliance with the policies or procedures may deteriorate.

In our opinion, management’s assertion that ADB maintained effective internal control over financial reporting as of December 31, 2012, is fairly stated, in all material respects, based on the criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission.

We have also audited, in accordance with auditing standards generally accepted in the United States of America, the accompanying statement of financial position of Asian Development Bank (“ADB”) – Asia Pacific Disaster Response Fund as of December 31, 2012 and 2011 and the related statements of activities and changes in net assets, and cash flows for the years then ended and the related notes to the financial statements. Our report dated March 8, 2013 expressed an unqualified opinion on those financial statements.

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Public Accountants and Certified Public Accountants

Singapore March 8, 2013

215

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Deloitte & Touche LLP Certified Public Accountants Unique Entity No. T08LL0721A 6 Shenton Way, Tower Two #32-00 Singapore 068809

Tel: +65 6224 8288 Fax: +65 6538 6166 www.deloitte.com

INDEPENDENT AUDITORS’ REPORT

To the Board of Directors and the Board of Governors of Asian Development Bank

We have audited the accompanying financial statements of Asian Development Bank (“ADB”) – Asia Pacific Disaster Response Fund which comprise the statement of financial position as of December 31, 2012 and 2011, and the related statements of activities and changes in net assets, and cash flows for the years then ended, 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 accounting principles generally accepted in the United States of America; 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.

An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditor’s 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.

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Opinion

In our opinion, the financial statements referred to above present fairly, in all material respects, – the financial position of ADB Asia Pacific Disaster Response Fund as of December 31, 2012 and 2011, and the results of its operations and its cash flows for the years then ended in accordance with accounting principles generally accepted in the United States of America.

Report on Management’s Assertion on Internal Control over Financial Reporting

We have also audited, in accordance with attestation standards established by the American Institute of Certified Public Accountants, management’s assertion that ADB maintained effective internal control over financial reporting as of December 31, 2012, based on the criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated March 8, 2013 expressed an unqualified opinion on management’s assertion that ADB maintained effective internal control over financial reporting.

==> picture [192 x 27] intentionally omitted <==

Public Accountants and Certified Public Accountants

Singapore March 8, 2013

217

APDRF-1

ASIAN DEVELOPMENT BANK—ASIA PACIFIC DISASTER RESPONSE FUND

STATEMENT OF FINANCIAL POSITION 31 December 2012 and 2011

Expressed in Thousands of United States Dollars

ASSETS DUE FROM BANKS INVESTMENTS (Notes C and G) Time deposits ACCRUED REVENUE ADVANCES FOR GRANTS	2012 3,180 $ 7,171 0 11,101	2011
		4,349 $ 11,162 0 17,862
TOTAL	21,452 $	33,373 $
LIABILITIES AND UNCOMMITTED BALANCES ACCOUNTS PAYABLE AND OTHER LIABILITIES (Note D) UNDISBURSED COMMITMENTS (Notes E and G) TOTAL LIABILITIES UNCOMMITTED BALANCES (APDRF-2) (Note F), represented by: Unrestricted net assets	74 $ 11,124 11,198 10,254	13 $ 21,000
		21,013 12,360
TOTAL	21,452 $	33,373 $

0 = Less than $500

The accompanying notes are an integral part of these financial statements (APDRF-4).

218

APDRF-2

ASIAN DEVELOPMENT BANK—ASIA PACIFIC DISASTER RESPONSE FUND

STATEMENT OF ACTIVITIES AND CHANGES IN NET ASSETS For the Years Ended 31 December 2012 and 2011

Expressed in Thousands of United States Dollars

CHANGES IN UNRESTRICTED NET ASSETS REVENUE From investments (Note C) From other sources Total EXPENSES Grants (Note E) Administrative and financial expenses (Note D) Total REVENUE LESS THAN EXPENSES EXCHANGE GAINS (LOSSES)—net DECREASE IN NET ASSETS NET ASSETS AT BEGINNING OF YEAR	2012 9 $ 1 10 2,000 251 2,251 (2,241) 135 (2,106) 12,360	2011
		33 $ 1
		34
		15,000 13
		15,013
		(14,979) (141)
		(15,120) 27,480
NET ASSETS AT END OF YEAR	10,254 $	12,360 $

The accompanying notes are an integral part of these financial statements (APDRF-4).

219

APDRF-3

ASIAN DEVELOPMENT BANK—ASIA PACIFIC DISASTER RESPONSE FUND

STATEMENT OF CASH FLOWS For the Years Ended 31 December 2012 and 2011

Expressed in Thousands of United States Dollars

CASH FLOWS FROM OPERATING ACTIVITIES Interest on investments received Cash received from other sources Grants disbursed Administrative and financial expenses paid Net Cash Used in Operating Activities CASH FLOWS FROM INVESTING ACTIVITIES Maturities of investments Purchases of investments Net Cash Provided by Investing Activities Net Decrease in Due From Banks Due from Banks at Beginning of Year Due from Banks at End of Year RECONCILIATION OF DECREASE IN NET ASSETS TO NET CASH USED IN OPERATING ACTIVITIES: Decrease in net assets (APDRF-2) Adjustments to reconcile decrease in net assets to net cash used in operating activities: Change in accrued revenue Change in advances for grants Change in miscellaneous liabilities Change in accrued expenses Change in undisbursed commitments Exchange (gains) losses—net Net Cash Used in Operating Activities	2012 9 $ 1 (4,979) (191) (5,160) 269,501 (265,510) 3,991 (1,169) 4,349 3,180 $ (2,106) $ 0 6,897 60 0 (9,876) (135) (5,160) $	2011
		34 $ 1 (12,000) (63)
		(12,028)
		1,393,039 (1,384,073)
		8,966
		(3,062) 7,411
		4,349 $
		(15,120) $ 1 (12,000) (50) 0 15,000 141
		(12,028) $

0 = Less than $500.

The accompanying notes are an integral part of these financial statements (APDRF-4).

220

APDRF-4

ASIAN DEVELOPMENT BANK—ASIA PACIFIC DISASTER RESPONSE FUND NOTES TO FINANCIAL STATEMENTS 31 December 2012 and 2011

NOTE A—NATURE OF OPERATIONS

The Asian Development Bank (ADB), a multilateral development financial institution, was established in 1966 with its headquarters in Manila, Philippines. ADB and its operations are governed by the Agreement Establishing the Asian Development Bank (the Charter). Its purpose is to foster economic development and co-operation in Asia and the Pacific region and to contribute to the acceleration of the process of economic development of the developing member countries (DMCs) in the region, collectively and individually. Since 1999, ADB’s corporate vision and mission has been to help DMCs reduce poverty in the region. This was reaffirmed under the long-term strategic framework for 2008-2020 (Strategy 2020). Under Strategy 2020, ADB’s corporate vision continues to be “An Asia and Pacific Free of Poverty” and its mission has been to help its DMCs reduce poverty and improve living conditions and quality of life. ADB has been pursuing its mission and vision by focusing on three complementary strategic agendas: inclusive growth, environmentally sustainable growth, and regional integration. ADB provides financial and technical assistance for projects and programs, which will contribute to achieving this purpose. These are financed through ordinary capital resources (OCR) and Special Funds.[1]

The APDRF was established on 1 April 2009, to provide, in a timely fashion, incremental grant resources to DMCs affected by a natural disaster. The APDRF will help bridge the gap between existing ADB arrangements that assist DMCs to reduce disaster risk through hazard mitigation loans and grants, and longer-term post-disaster reconstruction lending. The APDRF will provide quick-disbursing grants to assist DMCs in meeting immediate expenses to restore life-saving services to affected populations following a declared disaster and in augmenting aid provided by other donors in times of national crisis.

Financial assistance will be provided in the form of grants in an amount totaling up to $3,000,000 per event.

APDRF’s resources may consist of contributions from ADB and other bilateral, multilateral, and individual sources, including companies and foundations.

ADB is immune from taxation pursuant to Chapter VIII, Article 56, Exemption from Taxation , of the Charter.

NOTE B—SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Presentation of the Financial Statements

The financial statements of the APDRF are prepared in accordance with accounting principles generally accepted in the United States of America (US GAAP), and are presented on the basis of those for not-forprofit organizations.

APDRF reports donors’ contributions of cash and other assets as unrestricted assets as these are made available to APDRF without conditions other than for the purpose of pursuing its objectives.

Functional and Reporting Currency

The United States dollar is the functional and reporting currency, representing the currency of the primary economic operating environment of APDRF.

1 Asian Development Fund (ADF), Technical Assistance Special Fund (TASF), Japan Special Fund (JSF), ADB Institute (ADBI), Pakistan Earthquake Fund (PEF), Regional Cooperation and Integration Fund (RCIF), Climate Change Fund (CCF), and Asia Pacific Disaster Response Fund (APDRF).

221

APDRF-4

continued

Translation of Currencies

ADB adopts the use of daily exchange rates for accounting and financial reporting purposes. This allows transactions denominated in non-US dollar currencies to be translated to the reporting currency using exchange rates applicable at the time of transactions. Contributions included in the financial statements during the year are recognized at applicable exchange rates as of the respective dates of commitment. At the end of each accounting month, translations of assets, liabilities, and uncommitted balances which are denominated in non-US dollar currencies are adjusted using the applicable rates of exchange at the end of the reporting period. These translation adjustments are accounted for as exchange gains or losses and are credited or charged to operations.

Investments

All investment securities held by APDRF are reported at fair value. Realized and unrealized gains and losses are included in revenue.

Interest income on time deposits is recognized as realized and reported in revenue from investments.

Contributions

The contributions from donors and the allocations from net income of OCR are included in the financial statements, from the date of effectivity of the contributions agreement, and the Board of Governors’ approval, respectively.

Technical Assistance, Grants and Undisbursed Commitments

Technical assistance (TA) and grants are recognized in the financial statements when the project is approved and becomes effective. Upon completion of the TA project or cancellation of a grant, any undisbursed amount is written back as a reduction in TA or grants for the year and the corresponding undisbursed commitment is eliminated accordingly.

Advances are provided from TA and grants to the executing agency or co-operating institution, for the purpose of making payments for eligible expenses. The advances are subject to liquidation and charged against undisbursed commitments. Any unutilized portion is required to be returned to the fund.

Fair Value of Financial Instruments

ASC 820 defines fair value as the price that would be received to sell an asset or paid to transfer a liability at measurement date in an orderly transaction among willing participants with an assumption that the transaction takes place in the entity’s principal market, or in the absence of principal market, in the most advantageous market for the asset or liability. The most advantageous market is the market where the sale of the asset or transfer of liability would maximize the amount received for the asset or minimize the amount paid to transfer the liability. The fair value measurement is not adjusted for transaction costs.

Fair Value Hierarchy

ASC 820 establishes a fair value hierarchy that gives the highest priority to quoted prices in active markets for identical assets or liabilities (Level 1), next priority to observable market inputs or market corroborated data (Level 2), and the lowest priority to unobservable inputs without market corroborated data (Level 3).

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APDRF-4

continued

The fair values of ADB’s financial assets and liabilities are categorized as follows:

Level 1: fair values are based on unadjusted quoted prices for identical assets or liabilities in active markets.

Level 2: fair values are based on quoted prices for similar assets or liabilities in active markets or markets that are not active; or valuation models for which significant inputs are obtained from market-based data that are observable.

Level 3: fair values are based on prices or valuation models for which significant inputs to the model are unobservable.

Inter-level transfers from one year to another may occur due to changes in market activities affecting the availability of quoted market prices or observable market data.

ADB’s policy is to recognize transfers in and transfers out of levels as of the end of the reporting period in which they occur.

Accounting Estimates

The preparation of financial statements in conformity with generally accepted accounting principles requires management to make reasonable estimates and assumptions that affect the reported amounts of assets and liabilities and uncommitted balances as of the end of the year and the reported amounts of revenue and expenses during the year. The actual results could differ from those estimates.

Accounting and Reporting Developments

In May 2011, the Financial Accounting Standards Board issued Accounting Standards Update 2011-04, “Fair Value Measurement (Topic 820) – Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in US GAAP and IFRSs,” which provides consistency between US GAAP and International Financial Reporting Standards (IFRSs) on the definition of fair value (FV) and guidance on how to measure FV and on what to disclose about FV measurements. The amendments to the update do not require additional FV measurements and are not intended to establish valuation standards or affect valuation practices outside of financial reporting. The new guidance is effective from quarter ended 31 March 2012 for ADB. This update did not have an impact on APDRF’s financial statements.

Statement of Cash Flows

For the purposes of the Statement of Cash Flows, APDRF considers that its cash and cash equivalents are limited to DUE FROM BANKS, which consists of cash on hand and current accounts in banks used for operational disbursements.

NOTE C—INVESTMENTS

The main investment management objective is to maintain security and liquidity. Subject to these parameters, ADB seeks the highest possible return on its investments. Investments are governed by the Investment Authority approved by the Board of Directors in 2006.

All investments held as of 31 December 2012 and 2011 were in time deposits.

The annualized rate of return on the average investments held during the period ended 31 December 2012, based on the portfolio held at the beginning and end of each month, was 0.17% (0.18% – 2011).

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Fair Value Disclosure

The fair value of investments as of 31 December 2012 and 2011 was as follows:

Assets Investments Time deposits	31 December 2012 7,171,000 $	Fair Value Measurements	Fair Value Measurements
		Level 1 – $	Level 2 Level 3 7,171,000 $ – $
Assets Investments Time deposits	31 December 2011 11,162,000 $	Fair Value Measurements
		Level 1 – $	Level 2 Level 3 11,162,000 $ – $

Time deposits are reported at cost, which approximates fair value.

ADB maintains documented process and internal controls to value the investment securities. The data management unit in treasury department is responsible for providing the valuation in accordance with the business process.

NOTE D—RELATED PARTY TRANSACTIONS

The OCR and special funds resources are at all times used, committed, and invested entirely separate from each other. The administrative and operational expenses pertaining to APDRF are settled regularly with OCR and the other funds. Regional technical assistance projects and programs may be combined activities financed by special and trust funds. ADB charges a service fee to cover ADB’s cost for the administration, management, supervision and operation of the APDRF. The service fee is currently 2% of the amount disbursed for investment projects. As of 31 December 2012, $67,000 ($7,000 – 2011) was payable to OCR which is included in ACCOUNTS PAYABLE AND OTHER LIABILITIES.

NOTE E—UNDISBURSED COMMITMENTS

Undisbursed commitments are denominated in United States dollars and represent grants not yet disbursed and unliquidated. The fair value of undisbursed commitments approximates the amounts outstanding, because ADB expects that disbursements will substantially be made for all the projects/programs covered by the commitments.

NOTE F—CONTRIBUTIONS AND UNCOMMITTED BALANCES

No contributions were received during 2012 and 2011.

Uncommitted balances comprise amounts which have not been committed by ADB as of 31 December 2012 and 2011.

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NOTE G—OTHER FAIR VALUE DISCLOSURES

As of 31 December 2012 and 2011, APDRF has no assets or liabilities measured at fair value on a nonrecurring basis. See Notes C and E for discussions relating to investments and undisbursed commitments, respectively. In all other cases, the carrying amount of APDRF’s assets and liabilities are considered to approximate fair values.

NOTE H—SUBSEQUENT EVENTS

ADB has evaluated subsequent events after 31 December 2012 through 8 March 2013, the date these Financial Statements are available for issuance. As a result of this evaluation, there are no subsequent events, as defined, that require recognition or disclosure in the APDRF’s Financial Statements as of 31 December 2012.