ASIAN DEVELOPMENT BANK — Annual Report 2013

May 8, 2014

These financial statements were noted by ADB’s Board of Directors on 8 April 2014. They are subject to the approval of ADB’s Board of Governors at the ADB Annual Meeting in Astana, Kazakhstan, to be held on 2–5 May 2014.

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Management’s Discussion and Analysis and

Annual Financial Statements

31 December 2013

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	9
		3. Syndications	10
		4. Equity Investments	10
	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	23
		5. Capital Adequacy	24
		6. Asset and Liability Management	24
	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	31
	F.	Regional Cooperation and Integration Fund	32
	G.	Climate Change Fund	32
	H.	Asia Pacific Disaster Response Fund	33
	I.	Financial Sector Development Partnership Special Fund	33
**IV. **	Grant Cofinancing		34
Appendix: Ordinary Capital Resources Condensed Management Reporting Balance Sheets			37

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 2013 and 2012	44
OCR-2	Statement of Income and Expenses for the Years Ended 31 December 2013 and 2012	46
OCR-3	Statement of Comprehensive Income (Loss) for the Years Ended
	31 December 2013 and 2012	47
OCR-4	Statement of Changes in Capital and Reserves for the Years Ended 31 December 2013
	and 2012	48
OCR-5	Statement of Cash Flows for the Years Ended 31 December 2013 and 2012	49
OCR-6	Summary Statement of Loans, 31 December 2013 and 2012	50
OCR-7	Summary Statement of Borrowings, 31 December 2013 and 2012	52
OCR-8	Statement of Subscriptions to Capital Stock and Voting Power, 31 December 2013	54
OCR-9	Notes to Financial Statements, 31 December 2013 and 2012	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		104
Independent	Auditors’ Report on Internal Control over Financial Reporting	105
Independent	Auditors’ Report on Financial Statements	107
ADF-1	Special Purpose Statement of Assets, Liabilities and Fund Balances,
	31 December 2013 and 2012	109
ADF-2	Special Purpose Statement of Revenue and Expenses for the Years Ended
	31 December 2013 and 2012	110
ADF-3	Special Purpose Statement of Comprehensive Income for the Years Ended
	31 December 2013 and 2012	111
ADF-4	Special Purpose Statement of Changes in Fund Balances for the Years Ended
	31 December 2013 and 2012	112
ADF-5	Special Purpose Statement of Cash Flows for the Years Ended
	31 December 2013 and 2012	113
ADF-6	Special Purpose Summary Statement of Loans, 31 December 2013 and 2012	114
ADF-7	Special Purpose Statement of Resources, 31 December 2013	116
ADF-8	Notes to Special Purpose Financial Statements, 31 December 2013 and 2012	117

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		128
Independent	Auditors’ Report on Internal Control over Financial Reporting	129
Independent	Auditors’ Report on Financial Statements	131
TASF-1	Statement of Financial Position, 31 December 2013 and 2012	133
TASF-2	Statement of Activities and Changes in Net Assets for the Years Ended
	31 December 2013 and 2012	134
TASF-3	Statement of Cash Flows for the Years Ended 31 December 2013 and 2012	135
TASF-4	Statement of Resources, 31 December 2013	136
TASF-5	Summary Statement of Technical Assistance Approved and Effective for the Year Ended 31
	December 2013	137
TASF-6	Notes to Financial Statements, 31 December 2013 and 2012	138

IV. Japan Special Fund (JSF)

IV. Japan Special Fund (JSF)	IV. Japan Special Fund (JSF)
Management’s Report on Internal Control over Financial Reporting		144
Independent	Auditors’ Report on Internal Control over Financial Reporting	145
Independent	Auditors’ Report on Financial Statements	147
JSF-1	Statement of Financial Position, 31 December 2013 and 2012	149
JSF-2	Statement of Activities and Changes in Net Assets for the Years Ended
	31 December 2013 and 2012	150
JSF-3	Statement of Cash Flows for the Years Ended 31 December 2013 and 2012	151
JSF-4	Notes to Financial Statements, 31 December 2013 and 2012	152

V. Asian Development Bank Institute (ADBI)

Independent Auditors’ Report 158 ADBI-1 Statement of Financial Position, 31 December 2013 and 2012 160 ADBI-2 Statement of Activities and Changes in Net Assets for the Years Ended 31 December 2013 and 2012 161 ADBI-3 Statement of Cash Flows for the Years Ended 31 December 2013 and 2012 162 ADBI-4 Notes to Financial Statements, 31 December 2013 and 2012 163

VI. Pakistan Earthquake Fund (PEF)

VI. Pakistan Earthquake Fund (PEF)	VI. Pakistan Earthquake Fund (PEF)
Management’s Report on Internal Control over Financial Reporting		176
Independent	Auditors’ Report on Internal Control over Financial Reporting	177
Independent	Auditors’ Report on Financial Statements	179
PEF-1	Statement of Financial Position, 31 December 2013 and 2012	181
PEF-2	Statement of Activities and Changes in Net Assets for the Years Ended
	31 December 2013 and 2012	182
PEF-3	Statement of Cash Flows for the Years Ended 31 December 2013 and 2012	183
PEF-4	Notes to Financial Statements, 31 December 2013 and 2012	184

VII. Regional Cooperation and Integration Fund (RCIF)

VII. Regional Cooperation and Integration Fund (RCIF)	VII. Regional Cooperation and Integration Fund (RCIF)
Management’s Report on Internal Control over Financial Reporting		189
Independent	Auditors’ Report on Internal Control over Financial Reporting	190
Independent	Auditors’ Report on Financial Statements	192
RCIF-1	Statement of Financial Position, 31 December 2013 and 2012	194
RCIF-2	Statement of Activities and Changes in Net Assets for the Years Ended
	31 December 2013 and 2012	195
RCIF-3	Statement of Cash Flows for the Years Ended 31 December 2013 and 2012	196
RCIF-4	Notes to Financial Statements, 31 December 2013 and 2012	197

VIII. Climate Change Fund (CCF)

VIII. Climate Change Fund (CCF)	VIII. Climate Change Fund (CCF)
Management’s Report on Internal Control over Financial Reporting		202
Independent	Auditors’ Report on Internal Control over Financial Reporting	203
Independent	Auditors’ Report on Financial Statements	205
CCF-1	Statement of Financial Position, 31 December 2013 and 2012	207
CCF-2	Statement of Activities and Changes in Net Assets for the Years Ended
	31 December 2013 and 2012	208
CCF-3	Statement of Cash Flows for the Years Ended 31 December 2013 and 2012	209
CCF-4	Notes to Financial Statements, 31 December 2013 and 2012	210

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		215
Independent	Auditors’ Report on Internal Control over Financial Reporting	216
Independent	Auditors’ Report on Financial Statements	218
APDRF-1	Statement of Financial Position, 31 December 2013 and 2012	220
APDRF-2	Statement of Activities and Changes in Net Assets for the Years Ended
	31 December 2013 and 2012	221
APDRF-3	Statement of Cash Flows for the Years Ended 31 December 2013 and 2012	222
APDRF-4	Notes to Financial Statements, 31 December 2013 and 2012	223
X. Financial	Sector Development Partnership Special Fund (FSDPSF)
Management’s Report on Internal Control over Financial Reporting		228
Independent	Auditors’ Report on Internal Control over Financial Reporting	229
Independent	Auditors’ Report on Financial Statements	231
FSDPSF-1	Statement of Financial Position, 31 December 2013	233
FSDPSF-2	Statement of Activities and Changes in Net Assets for the Period 31 January to
	31 December 2013	234
FSDPSF-3	Statement of Cash Flows for the Period 31 January to 31 December 2013	235
FSDPSF-4	Notes to Financial Statements for the Period 31 January to 31 December 2013	236

MANAGEMENT’S DISCUSSION AND ANALYSIS

I. OVERVIEW

The vision of the Asian Development Bank (ADB), an international development financial institution, is for 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 and used separately. 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, which access 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 higher 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 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 2013 is provided 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 earning assets under the statutory reporting basis were higher for 2013, compared to 2012, mainly from the favorable change in fair value of some derivatives and associated borrowings. The lower rate of return on loans and cost of borrowings were generally in line with the market trend compared with 2012 (Table 2), while return on investments decreased due to the lag effect between the rising medium-term market interest rate environment and actual return from investments. 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 for 2013. Net income was $566 million compared with $142 million for 2012. The increased net income is mainly attributed to the unrealized gains from ADB’s derivatives and associated borrowings, compared with the unrealized losses in 2012.

ADB MANAGEMENT’S DISCUSSION AND ANALYSIS: 31 DECEMBER 2013

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

($ million)

Item	2013 2012 2011 2010 2009
Statutory Reporting Basis Revenue From Loans From Investments From Guarantees From Equity Investments From Other Sources Total Revenue Borrowings and Related Expenses Administrative Expensesa (Write-back) Provision for Loan Losses Other Expenses Total Expenses Net Realized Gains Net Unrealized Gains (Losses) Net Income (Loss) Average Earning Assetsb Annual Return on Average Earning Assets (%) Return on Equity (%) Return on Loans (%) Return on Investments (%) Cost of Borrowings(%)	646 770 650 681 960 339 390 365 368 459 18 18 16 11 9 10 39 44 58 24 22 21 20 24 19
	1,035 1,238 1,095 1,142 1,471
	400 520 368 386 742 411 351 316 294 194 (6) 7 (7) (45) 115 8 9 5 4 5
	813 887 682 639 1,056
	194 122 190 80 23 150 (331) 6 43 (466)
	566 142 609 626 (28) 78,828 76,361 69,112 62,445 54,655 0.72 0.19 0.88 1.00 (0.05) 3.43 0.87 3.74 3.97 (0.18) 1.31 1.56 1.34 1.61 2.67 1.43 1.69 2.04 2.17 2.93 0.51 0.91 1.13 2.06 2.91
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(%)	469 465 587 548 420 78,839 76,386 69,099 62,555 54,828 0.60 0.61 0.85 0.88 0.77 2.71 2.72 3.58 3.54 2.84 1.23 1.51 1.36 1.56 2.55 1.36 1.58 2.11 2.16 2.87 0.64 0.84 0.69 0.81 1.83

( ) = negative.

a Net of administrative expenses allocated to the Asian Development Fund and loan origination costs that are deferred. b Average 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 or losses and ADB’s proportionate share in unrealized gains or losses from equity investment accounted for under the equity method.

d Represents operating income over average earning assets.

Table 2: Selected US Dollar Interest Rates

	(%)
Item	2013	2012	2011	2010	2009
6-Month US Dollar LIBOR	0.35	0.51	0.81	0.46	0.43
3-Year US Dollar SwapRate	0.88	0.50	0.82	1.28	2.06
LIBOR = London interbank offered rate, US = United States.
Source: Bloomberg Finance L.P.

ADB MANAGEMENT’S DISCUSSION AND ANALYSIS: 31 DECEMBER 2013

4

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

($ million)

($million)
Item	2013	2012	Change
Income from loans	652	763	(111)
Interest income	637	766	(129)
Write-back (Provision) for loan losses	6	(7)	13
Others	9	4	5
Income from investments	351	407	(56)
Interest income	339	390	(51)
Realized gain	12	17	(5)
Income from equity investments	239	109	130
Profit on sale	178	90	88
Realized gain on proportionate share of income
from EI accounted for under the equity method	47	25	22
Dividend income	7	4	3
Impairment loss	(2)	(10)	8
Others	9	0	9
Other income—net	32	41	(9)
Borrowings and related expenses	394	504	(110)
Interest and other expenses	400	520	(120)
Realized gain	(6)	(16)	10
Administrative expenses—OCR	411	351	60
Operating income	469	465	4
Net unrealized gains (losses)	150	(331)	481
Proportionate share of income from
EI accounted for under the equity method	(53)	9	(62)
Net income	566	142	424

( ) = negative, EI = equity investments, OCR = ordinary capital resources. Note: 0 = amount less than $0.5 million. Numbers may not sum precisely because of rounding.

Operating income. Operating income[2] for 2013 was relatively stable at $469 million compared with $465 million for 2012. Changes in income and expense items were primarily driven by:

• a $130 million increase in income from equity investments mainly because of (a) an $88 million increase in profit on sale of equity investments, (b) a $22 million increase in ADB’s share of reported income of investee companies accounted for under the equity method, (c) $9 million in miscellaneous fees earned in 2013, and (d) an $8 million decrease in impairment loss; and

• a $110 million decrease in borrowings and related expenses due to a decrease in the average cost of borrowings.

These were partially offset by:

• a $111 million decrease in income from loans and a $56 million decrease in income from investments, mainly attributed to lower returns; and

• a $60 million increase in administrative expenses.

2 Operating income is defined as statutory net income before unrealized gains or losses and ADB’s proportionate share in unrealized gains or losses from equity investment accounted for under the equity method.

ADB MANAGEMENT’S DISCUSSION AND ANALYSIS: 31 DECEMBER 2013

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Net unrealized gains and losses. During 2013, ADB posted net unrealized gains of $150 million (2012: $331 million net unrealized losses). The upward shift in the medium-term interest rates and movement in credit spreads on ADB's own borrowings contributed to the unrealized gain in 2013. The unrealized losses in 2012 were mainly due to movements in ADB's credit spreads and one-time effect of enhancements in the swaps 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 loan (LCL) 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.

In 2011, ADB introduced policy-based lending, which enhanced the program lending policy by mainstreaming programmatic budget support and enhancing crisis response capacity. ADB has four policy-based lending products, each catering to a different situation in a DMC: stand-alone policy-based lending, programmatic approach, special policy-based lending, and countercyclical support facility lending.

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

Loan approvals, disbursements, repayments, and prepayments. In 2013, approved loans totaled $10,186 million, representing a $902 million increase from 2012 ($9,284 million). ADB approved 56 sovereign loans totaling $8,761 million and 19 nonsovereign loans totaling $1,425 million, compared with 2012 approvals of 49 sovereign loans totaling $8,277 million and 22 nonsovereign loans totaling $1,007 million.[3] Disbursements in 2013 totaled $5,985 million ($5,178 million for sovereign loans and $807 million for nonsovereign loans), a decrease of 11.5% from the $6,764 million disbursed in 2012. Regular principal repayments in 2013 were $4,461 million (2012: $3,197 million), while prepayments totaled $665 million (2012: $61 million). In 2013, 13 loans were fully prepaid for $530 million, and 22 loans were partially prepaid for $135 million. As of 31 December 2013, loans outstanding after allowance for loan losses and net unamortized loan origination cost totaled $53,088 million, of which sovereign loans represented $49,947 million and nonsovereign loans $3,141 million.

3 These exclude adjustments and terminations prior to signing.

ADB MANAGEMENT’S DISCUSSION AND ANALYSIS: 31 DECEMBER 2013

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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 (PFRs) submitted by the borrower. In 2013, MFFs totaling $1,555 million (2012: $2,612 million) were approved under OCR.[4] PFRs, under the MFFs, totaling $2,997 million were approved in 2013 (2012: $3,307 million); a total of $2,072 million was disbursed in 2013 (2012: $1,634 million).

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.

Status of loans. No loans were in nonaccrual status as of 31 December 2013 (one nonsovereign loan totaling $18 million as of 31 December 2012).

Loan charges on sovereign loans. LBLs and loans approved under the CSF carry a floating lending rate that comprises 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 loan balances beginning 60 days after signing of the applicable loan agreement; charges begin to accrue when the loan becomes effective.

Lending spread. Effective in 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.

Starting in 2004, ADB provided a 20 basis points waiver on the lending spread for borrowers or guarantors that do not have any OCR loans in arrears under ADB’s sovereign operations.[5] In 2013, the total waiver on the lending spread was $59 million (2012: $64 million). The waiver policy for the applicable loans is reviewed annually. In December 2013, the Board of Directors approved the continuation of this waiver policy only for borrowers of US dollar pool-based single currency loan (PSCL), covering the period commencing from 1 January 2014 up to 31 December 2014.

In December 2007, the ADB Board of Directors revised the pricing structure for all LBLs and LCLs negotiated on or after 1 October 2007, ADB eliminated the waiver mechanism and provided 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 spread.

In April 2010, the Board of Directors revised the loan charges where for 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 0.3% over the base lending rate; and (ii) negotiated from 1 July 2011, that the credit of 0.4% be reduced to

4 These amounts may be adjusted based on flexibility of the use of OCR and Asian Development Fund (ADF) funding.

5 Applicable for sovereign loans negotiated before 1 October 2007.

ADB MANAGEMENT’S DISCUSSION AND ANALYSIS: 31 DECEMBER 2013

7

0.2% for the duration of the loan, to result in a contractual spread of 0.4% over the base lending rate.

In December 2013, the Board of Directors approved revision to the loan pricing for all LBLs and LCLs negotiated on or after 1 January 2014 reducing the credit of 0.2% to 0.1% for the duration of the loan, resulting in a contractual spread of 0.5% over the base lending rate.

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

Maturity premium. In December 2011, the Board of Directors approved the introduction of maturity premiums for all LBLs (other than project design facility loans) 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 loan maturity for new loans to not exceed 19 years. As of 31 December 2013, 74 loans totaling $11,747 million were subject to maturity premium (2012: 29 loans totaling $4,509 million).

Results-based lending. In March 2013, the Board of Directors approved piloting results-based lending (RBL). This is a new modality to support government-owned sector programs and disburse ADB financing based on program results. Loan terms under RBL are the same as for investment projects. As of 31 December 2013, one OCR loan for $100 million was under RBL. During the year, disbursement under RBL totaled $20 million.

Rebates and surcharges . To maintain the principle of the cost pass-through pricing policy, ADB passes on the actual funding cost margin above or below LIBOR to its borrowers through a surcharge or rebate (Table 4). The funding cost margins are reset every year on 1 January and 1 July, 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 $79 million to its LBL borrowers in 2013 (2012: $77 million), and collected a surcharge of $3 million on CSF loans in 2013 (2012: $5 million).

Table 4: Funding Cost Margin

	Table 4: Funding Cost Margin
	(%peryear)
Type	(Rebate)or Surcharge
	1 July2013 1 January2013 1 July2012 1 January2012
LIBOR-based Loans US dollar Yen New Zealand dollar CSF Loans US dollar	(0.17) (0.19) (0.19) (0.19) (0.27) (0.29) (0.29) (0.28) 0.34 n/a n/a n/a 0.24 0.19 0.18 0.18

( ) = negative, n/a = not applicable, CSF = Countercyclical Support Facility, LIBOR = London interbank offered rate, US = United States.

ADB MANAGEMENT’S DISCUSSION AND ANALYSIS: 31 DECEMBER 2013

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Lending rates for PSCLs are based on the previous semester’s average cost of borrowing (Table 5). They have a lending spread of 60 basis points exclusive of waiver of 20 basis points over the base lending rate.

Table 5: Lending Rates[a]

		(%	peryear)
		2013	2012	PSCLs
1	January	4.95	4.40	US dollar
		1.94	1.70	Yen
1	July	5.27	4.73	US dollar
		0.97	1.66	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.

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)

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

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

a Progressive.

b Applicable to all interest periods from 1 January 2007 to 31 December 2014.

c Waiver on commitment fees w as available until 31 July 2013. There w ere no outstanding undisbursed balances as of 31 December 2013.

d 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 are typically 1% to 1.5% depending on the transaction. ADB applies a commitment fee typically of 0.50% to 0.75% per year on the undisbursed commitment.

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

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Direct value-added official loan cofinancing. In 2013, $3,088 million from official sources was mobilized for loan cofinancing for 23 loan projects, of which $329 million is under ADB administration and $2,759 million is under collaborative arrangements (Refer to Note F of OCR Financial Statements for loans administered by ADB as of 31 December 2013).

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 recognizes at the inception of a guarantee the noncontingent aspect of its obligations. In 2013, ADB approved one new guarantee facility totaling $35 million (2012: two guarantees totaling $403 million).

Trade Finance Program. The Trade Finance Program (TFP), which started operations in 2004, comprises 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 2013, 50 issuing banks in 13 countries availed of ADB’s standby letter of credit (credit guarantee facility) totaling $1,695 million (2012: $1,936 million), four major banks availed of the risk participation agreement totaling $556 million (2012: $291 million), and one issuing bank availed of the revolving credit facility for $5 million (2012: $21 million). ADB also transferred a portion of its risk in the credit guarantee facility amounting to $502 million (2012: $674 million) to three financial institutions. In addition, ADB supported $2,279 million (2012: $2,344 million) via cofinancing with partner commercial banks and risk distribution partners (insurance companies, export credit agencies, and development entities).

As of 31 December 2013, no TFP loans were outstanding (2012: $5 million), and guarantees totaled $595 million (2012: $554 million).

As of 31 December 2013, TFP exposure was $836 million against its $1 billion Board of Directors approved limit.

Supply Chain Finance Program. In 2012, ADB approved the Supply Chain Finance Program totaling $200 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. No amounts were outstanding as of 31 December 2013.

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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.[6] 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 2013, $220 million of B-loans[7] were provided for two projects (2012: $200 million for two projects).

4. Equity Investments

The Charter allows the use of OCR for equity investments up to 10% of its unimpaired paid-in capital actually paid up together with reserves and surplus, excluding special reserves. At the end of 2013, the total equity investment portfolio for OCR for both outstanding and undisbursed approved facilities totaled $1,375 million, or about 81% of the ceiling defined by the Charter.

In 2013, ADB approved four equity investments totaling $142 million (2012: three equity investments totaling $131 million). In the same period, it disbursed a total of $166 million in equity investments, a 48.2% increase from the $112 million disbursed in 2012, and received a total of $321 million from capital distributions and divestments, whether in full or in part, in 31 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.

E. Financing Resources

1. Capital and Reserves

The total authorized capital of ADB was 10,638,933 shares valued at $163,840 million as of 31 December 2013; subscribed capital was 10,572,003 shares valued at $162,809 million. Of the subscribed capital, $8,169 million was paid-in ($5,973 million of which was paid as of 31 December 2013) and $154,640 million 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.

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 the DMCs. In May 2013, the Board of Governors approved the allocation of 2012 net income of $124 million, after appropriation of guarantee fees to special reserve, as follows: (i) $322 million representing the ASC 815/825 adjustments and the unrealized portion of net income from equity investments accounted for under the equity method, be added from the cumulative revaluation adjustments account; (ii) $67 million be transferred to the loan loss reserve; (iii) $211 million to the ordinary reserve; (iv) $120 million to the Asian Development Fund (ADF); (v) $30 million to the Technical Assistance Special Fund (TASF); (vi) $9 million to the Climate Change Fund (CCF); (vii) $6 million to the Regional Cooperation and Integration Fund (RCIF); and (viii) $3 million to the Financial Sector Development Partnership Special Fund

6 Depending on whether ADB retains risk or not, ADB may or may not have a contingent liability.

7 A B-loan is a tranche of a direct loan nominally advanced by ADB, subject to eligible financial institutions’ taking funded risk participation within such a tranche and without recourse to ADB. It complements an A-loan funded by ADB. The $220 million of B-loans approved in 2013 include US dollar and local currency complementary loans.

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(FSDPSF). The Board of Governors also approved the transfer of $67 million from surplus to ordinary reserve.

Total shareholders’ equity increased from $16,420 million as of 31 December 2012 to $17,138 million as of 31 December 2013. This was the result of (i) an increase in paid-in capital, net of demand notes of $422 million; (ii) an $84 million decrease in other comprehensive income due to unfavorable currency translation adjustments and fair value changes in available for sale investments, offset by actuarial gains; (iii) net income for the year of $548 million, after appropriation of guarantee fees to the special reserve; and (iv) transfer of $168 million to Special Funds.

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, excluding special reserves. In addition, ADB policy limits gross outstanding borrowings to no more than the sum of callable capital from nonborrowing members, paid-in capital, and reserves (including surplus). As of 31 December 2013, the headroom for lending was $120,577 million ($120,720 million as of 31 December 2012) and for borrowings $61,292 million ($53,412 million as of 31 December 2012).

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 2013, 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.

2013 funding operations. In 2013, ADB raised the equivalent of about $11,975 million (2012: $13,217 million) in medium- and long-term funds with 58 borrowing transactions. The new borrowings were raised in 10 currencies: Australian dollar, Brazilian real, yen, Mexican peso, New Zealand dollar, pound sterling, Singapore dollar, South African rand, Turkish lira, and US dollar. Of the 2013 borrowings, $10,078 million was raised through 22 public offerings, including three global benchmark bond issues denominated in US dollars totaling $5,500 million. The remaining $1,897 million was raised through 36 private placements. The average maturity to first call date of these borrowings is 4.2 years (2012: 4.6 years). After swaps, $10,865 million or 91% was in US dollars and the remaining $1,110 million or 9% in yen.

Among its private placements in 2013, ADB raised about $234 million from its sale of clean energy bonds and $119 million from its sale of water bonds, bringing the cumulative thematic bond issuance to date to about $1,881 million equivalent. In addition, ADB completed buyback transactions with a total notional amount of about $173 million in 2013.

ADB also raised $2,518 million ($5,684 million in 2012) of short-term funds under its EuroCommercial Paper Program (ECP). Of the ECPs issued in 2013, $750 million were outstanding as of 31 December 2013. Table 7 shows details of 2013 borrowings as compared with 2012.

Local currency bond issues. 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 2013, ADB issued a Singapore dollar-denominated bond under its Asian Currency Note Programme totaling S$500 million ($402 million equivalent) at 1.027% due in 2018.

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Table 7: Borrowings

($ million)

($million)	($million)
Item		2013	2012
Long Term
	Total Principal Amount	11,975	13,217
	Average Maturity to
	First Call (years)	4.2	4.6
	Average Final Maturity (years)	4.6	7.1
	Number of Transactions
	Public Offerings	22	17
	Private Placements	36	60
	Number of Currencies (before swaps)
	Public Offerings	5	6
	Private Placements	9	6
Short Terma
	Total Principal Amountb	2,518	5,684
	Number of Transactions	12	36
	Number of Currencies	2	4
a	All euro commercial papers.
b	At year-end, the outstanding principal amount w as $750 million in 2013 ($1,849 million in		2012).

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 2013. Interest rate swaps are also used for asset and liability management purposes to match the liabilities with the interest rate characteristics of loans.

Figure 1: Effect of Swaps on Currency Composition of Borrowings As of 31 December 2013

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----- Start of picture text -----

Currency Composition of Currency Composition of
Outstanding Borrowings Outstanding Borrowings
(Before Swaps) (After Swaps)
Other Other
Currencies11.8% [a] 5.3%yen Currencies1.8% [b]
yen
3.9%
Turkish Lira
4.1%
pound sterling
4.3%
US dollar
60.6%
Australian
dollar
15.3%
US dollar
92.9%
----- End of picture text -----

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

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Figure 2: Effect of Swaps on Interest Rate Structure of Borrowings As of 31 December 2013

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----- Start of picture text -----

Interest Rate Structure of Interest Rate Structure of
Outstanding Borrowings Outstanding Borrowings
(Before Swaps) (After Swaps)
Variable Fixed
7.4% 7.9%
Fixed Variable
92.6% 92.1%
----- 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 2013, ADB held liquid investments in 24 currencies.

Liquid investments are held in government or 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 2013 and 2012 is presented in Table 8. The amortized cost and fair value returns of the portfolios are presented in Table 9.

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

($million)
Item	2013	2012
Core Liquidity Portfolio	15,890	15,012
Operational Cash Portfolio	222	212
Cash Cushion Portfolio	2,778	1,412
Discretionary Liquidity Portfolio	5,981	7,091
Other Portfolio	543	603
Total	25,414	24,330

Note: Numbers may not sum precisely because of rounding.

a Including securities purchased under resale arrangements, securities transferred under securities repurchase agreements, 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

Table 9: Return on Liquidity Portfolio	Table 9: Return on Liquidity Portfolio
	(%)
Item	2013 2012 2013 2012 Annualized Return Amortized Cost Fair Value
Core Liquidity Portfolio Operational Cash Portfolio Cash Cushion Portfolio Discretionary Liquidity Portfolioa Other Portfolio	1.9 2.3 0.2 2.1 0.1 0.1 0.1 0.1 0.4 0.5 0.4 0.5 0.3 0.4 0.3 0.4 2.7 2.7 0.7 1.4
Note: The amortized returns are based on income from invesments and realized gains and losses reported in the Statement of Income and Expenses. The fair value return incorporate unrealized gains and losses that are
reported as part of other comprehensive income (loss) and movements are dependent on prevailing market environment.
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 2.1 years as of 31 December 2013.

The operational cash portfolio, designed to meet net cash requirements over a 1-month horizon, 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 to opportunistically permit borrowing ahead of cash-flow needs, and to bolster ADB access to short-term 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 2013 and 2012. 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	2013	2012
Long-Term Debt	60,011	60,694
Undisbursed Loan
Commitments	32,134	30,500
Undisbursed Equity
Investment Commitments	587	652
Guarantee Commitments	2,302	2,614
Other Long-Term Liabilities	1,347	1,981
Total	96,381	96,441

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H. Risk Management

In its operations, ADB faces various kinds of risks, including financial, operational, and other organizational risks. ADB’s comprehensive risk management framework is built on three core components: 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 maintains an independent risk management group and has various management committees with responsibility to oversee ADB-wide risk issues and endorse related decisions for approval by the Board of Directors and President. ADB’s risk management framework 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 operations 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, provides loan loss provisions including collective provision requirements, and assesses its capital adequacy.

In carrying out its mission, ADB is exposed to credit, market, liquidity, and operational risks. 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 risk of 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 borrower.

ADB assigns a risk rating to each loan, guarantee, and treasury counterparty on an internal scale of 1 to 14 (Table 11). For sovereign and treasury counterparties, an 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 loans, guarantees, and equity, while the nonsovereign portfolio includes nonsovereign loans 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 3.9 (BBB) in 2012 to 3.8 (BBB) in 2013.

Table 12: Exposure to Credit Risk As of 31 December 2013 and 2012

Item	Exposure Rating Exposure Rating ($million) (1–14) ($million) (1–14) 2012 2013
Sovereign operations a. Loan and guarantee b. Equity Nonsovereign operations a. Loan and guarantee b. Publicly traded equity c. Private equity Treasury a. Fixed income b. Cash instruments c. Derivatives	50,685 50,802 50,585 5.0 / BBB– 50,752 5.2 / BBB– 100 n/a 50 n/a 4,594 4,843 3,742 6.3 / BB+ 3,737 6.3 / BB+ 114 n/a 271 n/a 738 n/a 835 n/a 26,514 1.0 / AA 25,357 1.0 / AA 18,021 1.0 / AA+ 18,807 1.0 / AA 8,316 1.1 / AA– 5,904 1.1 / AA– 177 1.0 / AA– 646 1.6 / A+
Aggregate Exposure	81,794 3.8/BBB 81,002 3.9/BBB
n/a = not applicable.
Note: Numbers may not sum precisely because of rounding.

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 by maintaining conservative equity levels. OCR has not experienced any loss of principal from sovereign operations. When countries have

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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 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.

Sovereign loan and guarantee exposure. The weighted average risk rating of the sovereign loan and guarantee portfolio improved from 5.2 (BBB–) in 2012 to 5.0 (BBB–) in 2013 because of improving sovereign credit conditions in many of ADB’s DMCs and more disbursements to high rated countries (Figure 3). Refer to Note F 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 2013 and 2012
(%)
2013 2012
High High
credit risk credit risk
9.3 9.9
Medium
credit risk
Medium
12.9
credit risk
22.4
Low Low
credit risk credit risk
77.9 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. Percentages may not total 100% because of rounding.

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 64.4% of the portfolio (Table 13).

Table 13: Sovereign Country Exposure

As of 31 December 2013 and 2012

Country	$ million % $ million % 2012 2013
People’s Republic of China India Indonesia Philippines Pakistan Others	13,225 26.1 12,620 24.8 11,249 22.2 10,732 21.1 8,169 16.1 9,063 17.8 4,741 9.4 5,894 11.6 4,660 9.2 4,995 9.8 8,641 17.0 7,498 14.8
Note: Percentages may not total 100% because of rounding.

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Expected loss . In 2013, ADB experienced an increase in the credit quality of some countries in the sovereign portfolio. As a result, expected loss decreased from $218 million in 2012 to $199 million in 2013 (Table 14).

Table 14: Sovereign Portfolio Expected Loss As of 31 December 2013 and 2012

Item	$ million % of SO portfolio $ million % of SO portfolio 2012 2013
Provision for Loan Losses Loan Loss Reserve Requirementa	– – – – 199 0.4 218 0.4
Expected Loss	199 0.4 218 0.4

– = nil, SO = sovereign operations.

a The loan loss reserve requirement is subject to the Board of Governors’ approval during the Annual Meeting in May 2014.

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. It 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 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.

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ADB uses limits for countries, industry sectors, corporate groups, obligors, products and individual transactions to manage concentration risk in the nonsovereign portfolio.

Nonsovereign loan and guarantee exposure . ADB assigns a risk rating to each nonsovereign loan and guarantee. During 2013, ADB’s weighted average risk rating stayed constant at 6.3 (BB+). Rating improvements driven by risk transfer agreements with stronger rated entities and the sale of an impaired asset was offset by an increase in transactions categorized as medium credit risk (Figure 4). Refer to Note F 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 2013 and 2012
(%)
2013 2012
High High credit
credit risk risk
11.1 12.2
Low credit
Low
risk
credit risk
39.2
39.0
Medium
Medium
credit risk
credit risk
49.9
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 $271 million in 2012 to $114 million in 2013. The decrease was from equity exits conducted during the year rather than declining values.

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.

Nonsovereign concentrations. The three largest nonsovereign country exposures as of 31 December 2013 were the PRC (19.9%), India (17.8%), and Pakistan (9.7%). The relative exposure of the top three countries increased from 45.4% in 2012 to 47.4% in 2013 (Table 15). All country exposures complied with ADB’s exposure limits.

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Table 15: Nonsovereign Country Exposure

As of 31 December 2013 and 2012

Country	$ million % $ million % 2012 2013
People’s Republic of China India Pakistan Thailand Indonesia Others	914 19.9 1,015 20.9 819 17.8 753 15.6 444 9.7 430 8.9 397 8.6 228 4.7 297 6.5 240 5.0 1,723 37.5 2,177 45.0

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

ADB employs the Global Industry Classification Standard for its nonsovereign exposures. Under this system, ADB is dominated by the utilities sector (Table 16). ADB maintains higher exposures in utilities because of the importance of infrastructure to economic development. To mitigate sector concentration, ADB conducts additional monitoring and reporting for these sectors and employs specialists in these areas.

Table 16: Nonsovereign Sector Exposure As of 31 December 2013 and 2012

Sector	$ million % $ million % 2012 2013
Utilities Banks Diversified Financials Energy Administration Others	2,114 46.0 1,989 41.1 732 15.9 817 16.9 559 12.2 517 10.7 524 11.4 575 11.9 355 7.7 350 7.2 312 6.8 595 12.3

Note: Numbers and percentages may not total because of rounding.

Expected loss . Expected loss in the nonsovereign portfolio decreased in 2013 (Table 17). The primary drivers for the decline in expected loss were the successful exit of a workout transaction and the increased use of qualifying risk transfer arrangements with highly creditworthy counterparties.

Table 17: Nonsovereign Portfolio Expected Loss

As of 31 December 2013 and 2012

Item	$ million % of NSO portfolioa $ million % of NSO portfolioa 2012 2013
Specific Provision for Loan Losses Collective Provision for Loan Losses Loan Loss Reserve Requirementb	7 0.2 13 0.3 29 0.8 30 0.8 31 0.8 43 1.2
Expected Loss	67 1.8 86 2.3
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 2014.

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.

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To mitigate issuer and counterparty credit risks, ADB only transacts with institutions rated by reputable international 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. ADB generally undertakes 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 cash or US government securities. 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 weighted average credit rating for the treasury portfolio was AA in 2013. About 99% of the portfolio was rated A– or better.

As of 31 December 2013, no fixed-income instruments, derivatives, or other treasury exposures were past due or impaired, the same as in 2012.

Deposits. ADB deposits funds only in institutions that have a minimum long-term average credit rating of A+ or short-term average credit rating of A-1. ADB maintains a watch list of institutions that it perceives to be potentially riskier based on internal credit risk assessments. Moreover, the size of the deposit is limited based on 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, sovereign-guaranteed securities and government-related enterprises including supranationals 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 and adjusted its risk exposures accordingly.

Table 18: Fixed Income Portfolio by Asset Class As of 31 December 2013 and 2012

As of 31 December 2013	and 2012
Item	$ million % $ million % 2012 2013
Government Government Guaranteed Government-Sponsored Enterprises and Supranationals Corporates	10,676 59.2 10,122 53.8 2,636 14.6 3,630 19.3 3,626 20.1 3,857 20.5 1,083 6.0 1,198 6.4
Total	18,021 100.0 18,807 100.0

Note: Numbers may not sum precisely because of rounding.

Derivatives . All eligible 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 to be potentially riskier based on internal credit risk assessments. At the end of 2013, all of the marked-to-market exposure was collateralized.

Country exposure. At the end of 2013, treasury credit risk exposure was allocated across 29 countries with the largest exposure in Japan (Table 19).

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Table 19: Treasury Country Exposure

As of 31 December 2013 and 2012

Country	$ million % $ million % 2012 2013
Japan United States Germany Canada United Kingdom Others	9,413 35.5 9,536 37.6 7,038 26.5 5,771 22.8 1,744 6.6 1,994 7.9 1,162 4.4 1,005 4.0 963 3.6 250 1.0 6,194 23.4 6,801 26.8
Total	26,514 100.0 25,357 100.0
Note: Percentages may not total 100% because of rounding.

European exposure. Exposure to credits of peripheral European countries 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. Interest rate risk in the operations portfolio is hedged as the 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.

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 major currencies of the CLP, which is the most exposed to interest rate risk.

Foreign exchange risk. 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 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.

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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 59% of ADB’s OCR, while major currencies account for 95% 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, increased from 1.9% in 2012 to 2.9% in 2013. This indicates a 5% probability that the portfolio will lose more than 2.9% ($439 million) of its value over the next year.

Duration. The major CLP’s interest rate sensitivity, as reflected in its weighted portfolio duration, increased from 1.9 years as of 2012 to 2.1 years as of 2013.

Stress testing . ADB measures the sensitivity of the major CLP currencies to interest rate changes. If interest rates were to rise 2%, the major currencies in the portfolio would be expected to lose 4.1% ($617 million). ADB also uses scenario analysis to assess how the major currencies in the CLP would respond to significant changes in market factors, such as those that have occurred. Because of the high quality of ADB 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 normal and stressed situations and to manage liquidity optimally to achieve its development mission. In December 2011, the Board of Directors approved a revised liquidity policy framework. The revised policy redefines 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 amount of minimum liquidity is designed to enable ADB to cover normal net cash requirements for 18 months under normal and stressed situations without borrowing. The liquidity levels and cash requirements are monitored on an ongoing basis and reviewed by the Board of Directors quarterly. The new policy allows for the 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 defines operational risk as the risk of loss resulting from inadequate or failed internal processes, people, or systems, or from external events. ADB manages its operational risks using a framework endorsed by the Risk Committee and approved by the President in 2012. The framework enables ADB to implement an approach that focuses on identifying, accessing, 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 continues to roll out operational risk management methodologies and tools across organizational lines.

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Like any other organization, ADB is exposed to various types of operational risk, which it mitigates by applying internal controls and monitoring areas of particular concern. ADB utilizes risk transfer, including insurance, for mitigating low frequency and high severity operational risks. In addition, ADB effected enhancements to its business continuity management including (i) streamlining the business continuity management system, (ii) improving information technology for disaster recovery, (iii) enhancing recovery sites, and (iv) strengthening business continuity plan testing.

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 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.

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 2013, the stress test indicated that ADB had adequate capital to absorb the losses of a severe credit shock and to continue its development lending.

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 financial risks. The aim is to provide resources for developmental lending at the lowest and most stable funding cost to borrowers, along with the most reasonable lending terms, while safeguarding ADB’s financial strength. ADB’s asset and liability management aims to safeguard net worth from foreign exchange rate risks, protect net interest margin from fluctuations in interest rates, and provide sufficient liquidity to meet ADB 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.

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I. Internal Control over Financial Reporting

ADB 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 the Internal Control – Integrated Framework (1992) .[8] 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 includes a review of 48 business processes for 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 are responsible for (i) identifying and testing key controls and (ii) assessing and evaluating the design and operating effectiveness of the business processes. Concurrently in 2013, 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 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 requiring 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.

Provision for loan losses and loan loss reserves . In 2006, the Board of Directors 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.

8 The revised framework issued in May 2013 will become effective for the 2014 financial statements. ADB is currently assessing the impact of the new framework for ADB’s financial reporting.

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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 P—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 (JSF), ADBI, the Pakistan Earthquake Fund (PEF), the RCIF, the CCF, Asia Pacific Disaster Response Fund (APDRF), and the FSDPSF. Financial statements for each Special Fund are prepared in accordance with US GAAP except for the ADF, for which special purpose financial statements are prepared.

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 33 donors (regional and nonregional). Cofinancing with bilateral and multilateral development partners complements ADF resources.

In July 2012, the Board of Governors adopted a resolution providing for the 10th replenishment of the ADF (ADF XI) and the 5th 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 replenishment of the TASF in conjunction with the ADF replenishment to finance TA operations under the TASF. The total replenishment of SDR8,065 million ($12,608 million at Resolution No. 357 exchange rates) comprised SDR7,824 million for ADF XI and SDR241 million for the TASF. About 38% of the replenishment will be financed from new donor contributions totaling SDR3,067 million ($4,796 million equivalent). The replenishment became effective on 4 June 2013. As of 31 December 2013, ADB had received 27 instruments of contributions from donors for a total of SDR2,778 million ($4,344 million).

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

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2013, 18 of 28 borrowing members had signified their agreement to the conversion. The outstanding balance of their SDR-converted loans amounted to $12,219 million.

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 2013, the interest rate is set at (i) 1.0% during the grace period and 1.5% thereafter (2012: 1.0% during the grace period and 1.5% thereafter) for ADF-only countries; and (ii) 2.0% fixed for the life of the loans for blend countries. Three loans were approved under this facility in 2013.

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 million.

Launched in 1996 by the IDA and the International Monetary Fund (IMF), the HIPC Initiative provides partial debt relief to poor countries with external debt that severely burdens 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.[9] Of these, only Afghanistan became eligible and reached the decision point under the HIPC Initiative on 9 July 2007. The decision point is where an HIPC country, having met certain conditions,[10] becomes eligible to receive interim debt relief on a provisional basis following approval by the ADB Board of Directors 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 million and was to be provided through a reduction of Afghanistan’s debt

9 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.

10 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.

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service from July 2008 to February 2028. As of December 2013, the ADF had delivered $10 million under this arrangement, bringing the balance to $96 million.

Contributed resources. The total replenishment of SDR8,065 million for ADF XI and TASF V comprises SDR4,691 million financed from internal resources, SDR3,067 million from new donor contributions, and SDR307 million from net income transfers from OCR. This covers 2013–2016, which became effective in June 2013 after instruments of contribution deposited with ADB for unqualified contribution exceeded 50% of all pledged contributions. As of 31 December 2013, 27 donors had contributed a total of $3,848 million equivalent, of which $943 million (including the allocation to the TASF) had been received and made available for operational commitments. The remaining unpaid contributions under ADF VIII, ADF IX, ADF X and ADF XI as of 31 December 2013 totaled $531 million.[11] (For details of amounts released for operational commitments in 2013, 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 2013 was $422 million, compared with $849 million as of 31 December 2012 (Table 20).

In May 2013, the Board of Governors approved the transfer of $120 million to the ADF as part of the net income allocation for OCR (2012: $120 million). In addition, $532 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 2013, deposited installments under ADF XI amounted to $1,022 million, and ADF XI promissory notes encashed totaled $338 million. About $74 million was transferred to the TASF.

Loan approvals, disbursements, and repayments. In 2013, 46 ADF loans totaling $3,007 million were approved compared with 60 ADF loans totaling $2,184 million in 2012.[12] Disbursements during 2013 totaled $1,975 million, an increase of 53.6% from $1,286 million in 2012. At the end of 2013, cumulative disbursements from ADF resources were $35,535 million. Loan repayments during the year totaled $1,677 million (2012: $1,111 million). At the end of 2013, outstanding ADF loans amounted to $28,680 million (2012: $29,165 million).

In 2013, MFF for $505 million (2012: $93 million) was approved under the ADF. PFRs under the MFFs totaling $325 million were approved in 2013 (2012: $237 million). A total of $242 million under the MFFs was disbursed in 2013 (2012: $165 million).

Results-based lending . As of 31 December 2013, one ADF loan for $100 million was approved under RBL. The loan will be used to support the education sector development program of one sovereign borrower. Disbursement for the year under RBL was $20 million.

Project design facility. In April 2011, ADB established the project design facility on a pilot basis to support project preparation, particularly detailed engineering designs, through project design advances. Loans approved under the facility carry standard interest for OCR or the ADF. Payment of interest is deferred until the project design advance is refinanced out of the loans proceeds, or other repayment terms take effect. As of 31 December 2013, one ADF loan was approved under the project design facility (2012: one).

11 At US dollar equivalent at 31 December 2013 exchange rates.

12 Number and amount of loans exclude adjustments and terminations prior to signing.

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Investment portfolio position. The ADF investment portfolio[13] totaled $6,966 million at the end of 2013 compared with $6,519 million at the end of 2012. About 20.2% of the portfolio was invested in bank deposits, and 79.8% in fixed-income securities. The annualized rate of return on ADF investments including unrealized gains and losses was 0.2% (2012: 1.1%).

Table 20: Asian Development Fund Commitment Authority[a] 31 December 2013 and 2012

($ million)

Item	2013b 2012c 851 – – 122 861 – 135 3,734 – 135 – 8 1,806 7,112 120 480 532 1,018 – 51 4,305 12,660 3,882 11,811 422 849 d ~~d~~ e
Carryover of ADF X Commitment Authority Carryover of ADF IX Commitment Authority ADF XI Contributions 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 Commitment Authority Loans and Grants Committed
ADF Commitment Authority Available for Future Commitments

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 US dollar as of 31 December 2013 and 2012 exchange rates.

• b Includes resources made available under the ADF XI replenishment (Starting 1 January 2013). c Cumulative for the ADF X replenishment (2009-2012).

• d The US dollar equivalent of SDR552 million–the remaining ADF X commitment authority–at 31 December 2013 and 2012 exchange rates.

• e Represents additional payments of Italy and the United States including the corresponding pro rated amounts released by France, Germany and Turkey.

Grants. In 2013, ADB approved 20 grants (2012: 23) totaling $843 million (2012: $666 million),[14] of which $369 million were PFRs under MFFs (2012: $349 million)[15] while 18 grants (2012: 20) totaling $448 million (2012: $384 million) became effective, net of $100 million (2012: $36 million) in write-backs of undisbursed commitments for savings on financially closed and/or cancelled projects.

Direct value-added official cofinancing for ADF loans and grants. In 2013, $977 million (2012: $429 million) was mobilized in official loan and grant cofinancing for 19 ADF-financed projects (2012: 27) totaling $1,125 million (2012: $1,467 million).

13 Includes securities purchased under resale arrangement.

14 This excludes partial cancellation of grant funded by a cofinancier.

15 These amounts are adjusted based on flexibility of the use of OCR and ADF funding.

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B. Technical Assistance Special Fund

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

In July 2012, as part of ADF XI replenishment, the donors agreed to contribute 3% of the total replenishment size as the fifth replenishment of the TASF. The replenishment covers 2013–2016.

Contributed resources. As of 31 December 2013, 27 donors had committed a total of $340.8 million to the TASF as part of the ADF XI and the fifth regularized replenishment of the TASF. Of the total commitment, $85.2 million had been received.

As part of the ADF X and fourth regularized replenishment of TASF, $311.6 million of the total commitment of $339.3 million, had been received as of 31 December 2013.

During the period, India made a direct voluntary contribution of Rs10.0 million ($0.2 million) and Pakistan made a direct voluntary contribution of $0.1 million. In addition, $30.0 million was allocated to the TASF as part of the OCR net income allocation, $7.0 million was committed for the fourth regularized replenishment of the TASF, and $340.8 million was committed for the fifth regularized replenishment of the TASF. At the end of 2013, TASF resources totaled $2,273.3 million, of which $1,943.7 million was committed, leaving an uncommitted balance of $329.6 million ($141.2 million as of 31 December 2012) (Table 21).

Table 21: Technical Assistance Special Fund

Cumulative Resources ($ million)

($million)
Item	2013	2012
Regularized Replenishment
Contributions	1,114.7	766.8
Allocations from OCR Net Income	879.0	849.0
Direct Voluntary Contributions	90.5	90.2
Income from Investment and
Other Sources	192.6	189.9
Transfers from the TASF to the ADF	(3.5)	(3.5)
Total	2,273.3	1,892.4

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

Operations. TA commitments (approved and effective) increased from $128.3 million in 2012 to $133.3 million in 2013 for 205 TA projects and 31 supplementary approvals that were made effective during the year, net of $15.5 million (2012: $19.2 million) in write-backs of undisbursed commitments for completed and canceled TA projects. Undisbursed commitments net of advances for TA increased to $342.7 million as of 31 December 2013 ($321.0 million as of 31 December 2012). The TASF financed 34.3% of all TA activities approved in 2013.

Investment position. As of 31 December 2013, the total investment portfolio, including securities purchased under resale arrangements, amounted to $414.0 million, compared with $416.7 million at the end of 2012. Revenue from investments decreased from $3.0 million in 2012 to $2.5 million in 2013.

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C. Japan Special Fund

The JSF 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 2013, 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 projects that are not yet effective, was $62.6 million as of 31 December 2013 ($61.3 million as of 31 December 2012).

Operations. In 2013, no new TA projects or grants were approved or made effective (2012: one TA for $0.9 million), and $1.5 million was written back for financially completed and cancelled projects (2012: $4.8 million). Undisbursed commitments net of advances for TA projects as of 31 December 2013 were $13.8 million, compared with $21.0 million as of the end of 2012.

Investment position. As of 31 December 2013, the total investment portfolio amounted to $75.8 million, lower than the balance of $81.9 million as of 31 December 2012. Revenue from investments decreased from $0.18 million in 2012 to $0.15 million in 2013.

D. ADB Institute

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 the DMCs. Its operating costs are met by the Institute, and it is administered in accordance with the Statute of the Institute.

In July 2013, the Government of Japan committed its 21st contribution for ¥672.1 million ($6.8 million equivalent) and in December 2013, committed its 22nd contribution for ¥672.1 million ($6.4 million equivalent).

As of 31 December 2013, cumulative contributions committed to the Institute amounted to ¥22.6 billion, A$1.6 million, and $1.5 million (about $215.1 million equivalent), excluding translation adjustments. Of the total contributions received, $206.0 million had been used by the end of 2013 mainly for research and capacity building activities, including (i) organizing symposia, forums, and training sessions; (ii) preparing research reports, publications, and websites; and (iii) financing associated administrative expenses. The balance of net current assets (excluding property, furniture, and equipment) available for future projects and programs was about $9.1 million.

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, and all projects were financially completed as of 30 September 2013. The fund remains open pending completion of winding up activities.

ADB MANAGEMENT’S DISCUSSION AND ANALYSIS: 31 DECEMBER 2013

32

Contributed resources. As of 31 December 2013, PEF resources totaled $147.2 million, of which $128.9 million had been utilized, leaving an uncommitted balance of $18.3 million ($4.4 million as of 31 December 2012).

Operations . A write-back of $13.9 million (2012: nil) was made for a financially completed and cancelled grant. No new TA or grants were approved or made effective in 2013 and 2012. The fund had no undisbursed commitments net of grant advances as of 31 December 2013 (2012: $14.0 million).

Investment position. As of 31 December 2013, the total investment portfolio amounted to $17.5 million ($17.7 million as of 31 December 2012). Revenue from investments for 2013 increased to $0.3 million (2012: $0.2 million).

F. Regional Cooperation and Integration Fund

The RCIF 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. In May 2013, $6.0 million was transferred to the RCIF from OCR allocable net income. As of 31 December 2013, RCIF resources totaled $59.1 million, of which $54.0 million had been utilized, leaving an uncommitted balance of $5.1 million ($1.7 million as of 31 December 2012).

Operations . In 2013, net TA expenses totaled $2.2 million (2012: $2.1 million) comprising five TA projects and two supplementary approvals totaling $3.0 million became effective (2012: four TA projects for $2.1 million) and $0.8 million (2012: $0.3 million) write-back on financially completed and/or cancelled projects. The balance of undisbursed commitments net of grant advances as of 31 December 2013 amounted to $12.6 million (2012: $16.2 million).

Investment position. As of 31 December 2013, the total investment portfolio amounted to $17.5 million ($17.6 million as of 31 December 2012). Revenue from investments for 2013 was $0.03 million (2012: $0.04 million).

G. Climate Change Fund

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

Contributed resources. In May 2013, $9.0 million was transferred to the CCF from OCR allocable net income. As of 31 December 2013, CCF resources totaled $60.3 million, of which $46.7 million had been utilized, leaving an uncommitted balance of $13.6 million ($7.9 million as of 31 December 2012).

Operations. In 2013, net TA and/or grant expenses totaled $2.9 million (2012: $6.0 million), comprising four TA projects and one grant totaling $3.3 million that became effective, and a $0.4 million write-back for financially completed and/or cancelled projects (2012: seven TA projects, one grant totaling $7.0 million, and a $1.0 million write-back). The balance of undisbursed commitments net of grant and/or TA advances as of 31 December 2013 amounted to $25.0 million (2012: $25.0 million).

ADB MANAGEMENT’S DISCUSSION AND ANALYSIS: 31 DECEMBER 2013

33

Investment position . As of 31 December 2013, the total investment portfolio amounted to $36.9 million ($32.7 million as of 31 December 2012). Revenue from investments for 2013 and 2012 was $0.06 million.

H. Asia Pacific Disaster Response Fund

The APDRF was established on 1 April 2009 to provide timely incremental grant resources to DMCs affected by natural disasters.

Contributed resources. As of 31 December 2013, fund resources totaled $40.2 million, of which $35.5 million had been utilized, leaving an uncommitted balance of $4.7 million ($10.3 million as of 31 December 2012).

Operations. In 2013, net TA and/or grant expenses totaled $5.5 million (2012: $2.0 million) comprising six grants totaling $7.0 million that became effective and a $1.5 million write-back for financially completed and/or cancelled projects (2012: two grants totaling $2.0 million and no write-back). There fund had no undisbursed commitments net of grant advances as of 31 December 2013 (2012: $0.02 million).

Investment position. By 31 December 2013, all time deposit placements have matured ($7.2 million as of 31 December 2012). Revenue from investments for 2013 and 2012 was $0.01 million.

I. Financial Sector Development Partnership Special Fund

The FSDPSF was approved by the Board of Directors and established on 31 January 2013 to strengthen regional, subregional, and national financial systems in Asia and the Pacific.

Contributed resources. In May 2013, the Board of Governors approved the initial contribution of $2.7 million as part of OCR’s 2012 net income allocation. In 2013, the Government of Luxembourg committed contributions to the fund: $2.4 million in October and €1.5 million ($2.0 million equivalent) in December.

Operations. No TA or grants were approved during the period.

Investment position. As of 31 December 2013, the total investment portfolio amounted to $4.8 million representing the initial investment in US dollar deposits.

ADB MANAGEMENT’S DISCUSSION AND ANALYSIS: 31 DECEMBER 2013

34

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 $6,072.6 million in grants to ADB operations (Table 23). In 2013, grant cofinancing for ADB-approved projects totaled $763.7 million, comprising $278.1 million for 163 TA projects and $485.6 million for components of 29 investment projects. By the end of 2013, ADB was administering 41 trust funds, comprising 30 stand-alone trust funds[16] and 11 trust funds established under financing partnership facilities. Of these, 22 have balances totaling $614.4 million in grants. Additional grant resources from external partners totaled $644.1 million in 2013, comprising $372.1 million in new commitments, $165.7 million in replenishments for existing trust funds, and $106.3 million in additional allocation from global funding initiatives.[17] In 2013, grant commitments to new trust funds totaled $191.8 million (Table 22).

Table 22: Grant Commitments to New Trust Funds As of 31 December 2013

	($million)	($million)
Trust Fund	Amount	Donor	Date
Integrated Disaster Risk Management Fund	9.7	Canada	February 2013
Canadian Climate Fund for the
Private Sector in Asia	7.4	Canadaa	April 2013
Sanitation Financing Partnership Trust Fund	15.0	Bill & Melinda Gates Foundation	July 2013
Regional Malaria and Other Communicable
Disease Threats Trust Fund	19.4	United Kingdom	December 2013
Urban Climate Change Resilience	135.3	United Kingdom	December 2013
Trust Fund	5.0	Rockefeller Foundation	December 2013
Total	191.8

a Canada also earmarked $74.2 million for non-grant concessional financing to this trust fund.

Financing partners provided the following commitments and replenishments to existing trust funds:

• (i) $180.3 million from the Government of the United States for the Afghanistan Infrastructure Trust Fund;

• (ii) $103.9 million from the Government of Japan for the Afghanistan Infrastructure Trust Fund, Japan Fund for Poverty Reduction, and Japan Scholarship Program;

• (iii) $22.7 million from the Government of Norway for the Multi-Donor Clean Energy Fund under the Clean Energy Financing Partnership Facility;

• (iv) $15.7 million from the Government of Sweden for the Poverty and Environment Fund;

• (v) $15.0 million from the Government of the Netherlands for Netherlands Trust Fund under the Water Financing Partnership Facility;

• (vi) $8.0 million from the Government of the Republic of Korea for the e-Asia and Knowledge Partnership Fund; and

• (vii) $0.4 million from the Government of France for the Cooperation Fund for Project Preparation in the Greater Mekong Subregion and in Other Specific Asian Countries.

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

17 In addition, the Climate Investment Funds allocated $411.7 million for loans.

ADB MANAGEMENT’S DISCUSSION AND ANALYSIS: 31 DECEMBER 2013

35

Additional allocations from global funding initiatives comprised $77.1 million from the Climate Investment Funds, $14.6 million from the Global Agriculture and Food Security Program, and $14.6 million from the Global Environment Facility.

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. At the end of 2013, JFPR funds totaled about $615.4 million. The Government of Japan had approved 166 grant projects (equivalent to $474.5 million) and 155 TA projects (equivalent to $167.0 million) of which ADB had subsequently approved 161 grant projects (equivalent to $464.0 million) and 147 TA projects (equivalent to $158.5 million) funded by JFPR.

Japan Scholarship Program. The Government of Japan established the Japan Scholarship Program 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. From 1988 to 2013, Japan contributed $144.8 million and 3,104 scholarships were awarded to recipients from 35 member countries. Of the total, 2,758 have completed their courses. Women have received 1,101 scholarships. An average of 150 new scholarships have been awarded annually in the past 10 years. As of 2013, Japan Scholarship Program had 29 participating institutions in 10 countries.

ADB MANAGEMENT’S DISCUSSION AND ANALYSIS: 31 DECEMBER 2013

36

Table 23: Schedule of Contributions and Net Assets Grants from External Sources As of 31 December 2013

($ million)

Item Contribution Net Assetsa Administered by ADB Country Australia 692.4 57.3 Austria 17.7 1.3 Belgium 25.1 20.3 Brunei Darussalam 5.9 5.7 Cambodia 0.1 0.1 Canada 240.5 97.9 China, People's Republic of 240.1 221.1 Denmark 35.6 2.2 European Community 321.4 21.1 Finland 76.2 20.8 France 35.8 2.6 Germany 0.1 0.0 India 1.0 0.1 Indonesia 12.6 12.9 Ireland 2.4 0.2 Italy 2.2 – Japan 1,191.3 440.7 Korea, Republic of 169.4 137.1 Lao People’s Democratic Republic 0.1 0.1 Luxembourg 10.2 2.1 Malaysia 12.6 12.9 Myanmar 0.1 0.1 The Netherlands 373.9 50.2 New Zealand 36.0 0.2 Norway 166.9 27.9 Philippines 12.6 12.9 Portugal 1.4 0.9 Singapore 12.6 12.9 Spain 33.2 10.0 Sweden 262.5 67.6 Switzerland 37.8 5.6 Thailand 12.6 12.9 United Kingdom and Northern Ireland 672.0 223.9 United States 108.1 104.5 Viet Nam 1.1 1.1 Subtotal 4,823.6 1,587.5	Item Contribution Net Assetsa
	Others Cities Alliance 0.5 0.0 Clean Technology Fund 606.2 448.0 Fourth High Level Forum on Aid Effectiveness Trust Fund 0.2 (0.0) Future Carbon Fund 35.0 32.9 Global Agriculture and Food Security Program 41.1 2.0 Global Environment Fund 180.6 20.1 Special Climate Change Fund 3.9 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 29.2 0.0 Partnership for Market Readiness Multi-Donor Trust Fund 0.4 0.0 Private Sector and Foundations 11.6 0.1 Public Private Infrastructure Advisory Facility 0.6 0.0 Sanitation Financing Partnership Trust Fund 15.0 14.5 Strategic Climate Fund 191.0 66.1 Trust Fund for Forest 16.4 2.8 United Nations Children Fund 0.2 – United Nation Development Programme 111.0 – Urban Climate Change Resilience Trust Fund 5.0 4.8
	Subtotal 1,249.0 591.4
	Grand Total 6,072.6 2,178.9

• = 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 2013

Appendix 37

ORDINARY CAPITAL RESOURCES CONDENSED MANAGEMENT REPORTING BALANCE SHEETS As of 31 December 2013 and 2012

($ million)

Item	2012 Statutory Reporting Basis Adjustmentsa Management Reporting Basis Management Reporting Basis 2013
Due from banks Investments Securities transferred under repurchase agreements Securities purchased under resale arrangements Loans outstanding Unamortized net loan originations costs, less allowance for loan losses Equity investments Accrued interest receivable	316 316 263
	24,452 24,452 23,778
	592 592 348
	306 306 334
	53,051 53,051 52,814
	37 37 23
	819 (35) 784 864
Investments Loans	93 93 108 149 149 202
Receivable from swaps Borrowings Investments Loans Other assets
	27,322 (675) 26,647 27,699
	7,095 (19) 7,076 8,471
	626 (9) 617 592
	1,010 958 1,968 3,305
TOTAL	115,868 220 116,088 118,801
Borrowings Payable for swaps Borrowings Investments Loans Payable under securities repurchase agreements Payable for swap related collateral Accounts payable and other liabilities	61,630 (441) 61,189 63,022
	27,341 (98) 27,243 25,269
	6,428 (54) 6,374 8,192
	578 (17) 561 577
	602 602 350
	633 633 2,155
	1,518 1,518 2,067
Total Liabilities	98,730 (610) 98,120 101,632
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	5,885 958 6,843 6,010
	(1,390) (1,390) (888) 11,166 4 11,170 10,886 282 282 264 261 261 194 1,065 1,065 1,132 (38) 38 – – 548 (97) 451 446 (641) (73) (714) (875)
Total Equity	17,138 830 17,968 17,169
TOTAL	115,868 220 116,088 118,801

– = 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 for 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 2013

Financial Statements

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 2013. 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 (1992). Based on that assessment, management believes that as of 31 December 2013, ADB's internal control over financial reporting is effective based upon the criteria established in Internal Control – Integrated Framework (1992).

Takehiko Nakao President

Thierry de Longuemar

Vice-President (Finance and Risk Management)

Simon T. Bradbury Controller

12 March 2014

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Deloitte & Touche LLP Unique Entity No. T08LL0721A 6 Shenton Way #32-00 OUE Downtown 2 Singapore 068809

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

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, 2013, based on the criteria established in Internal Control — Integrated Framework (1992) 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.

Deloitte & Touche LLP (Unique Entity No. T08LL0721A) is an accounting limited liability partnership registered in Singapore under the Limited Liability Partnerships Act (Chapter 163A).

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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, 2013, is fairly stated, in all material respects, based on the criteria established in Internal Control — Integrated Framework (1992) 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 sheets of Asian Development Bank (“ADB”) – Ordinary Capital Resources as of December 31, 2013 and 2012 and the related statements of income and expenses, comprehensive income (loss), 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 12, 2014 expressed an unqualified opinion on those financial statements.

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Public Accountants and Chartered Accountants Singapore

March 12, 2014

42

==> picture [130 x 25] intentionally omitted <==

Deloitte & Touche LLP Unique Entity No. T08LL0721A 6 Shenton Way #32-00 OUE Downtown 2 Singapore 068809

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

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, 2013 and 2012, and the related statements of income and expenses, comprehensive income (loss), changes in capital and reserves, 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.

Deloitte & Touche LLP (Unique Entity No. T08LL0721A) is an accounting limited liability partnership registered in Singapore under the Limited Liability Partnerships Act (Chapter 163A).

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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 – Ordinary Capital Resources as of December 31, 2013 and 2012, 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, 2013, based on the criteria established in Internal Control — Integrated Framework (1992) issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated March 12, 2014 expressed an unqualified opinion on management’s assertion that ADB maintained effective internal control over financial reporting.

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Public Accountants and Chartered Accountants Singapore

March 12, 2014

44

ASIAN DEVELOPMENT BANK—ORDINARY CAPITAL RESOURCES BALANCE SHEET

31 December 2013 and 2012 Expressed in Millions of US Dollars

ASIAN DEVELOPMENT BANK—ORDINARY CAPITAL RESOURCES BALANCE SHEET 31 December 2013 and 2012 Expressed in Millions of US Dollars	ASIAN DEVELOPMENT BANK—ORDINARY CAPITAL RESOURCES BALANCE SHEET 31 December 2013 and 2012 Expressed in Millions of US Dollars
A S S E T S
DUE FROM BANKS (Note C) INVESTMENTS (Notes D, I, N, and Q) Government or government-guaranteed obligations Time deposits Other securities SECURITIES TRANSFERRED UNDER REPURCHASE AGREEMENTS (Notes D, E, and Q) SECURITIES PURCHASED UNDER RESALE ARRANGEMENTS (Notes D and Q) LOANS OUTSTANDING (OCR-6) (Notes A, F, I, and Q) (Including net unamortized loan origination costs of $73 – 2013 and $66 – 2012) Sovereign Nonsovereign Less—allowance for loan losses EQUITY INVESTMENTS (Notes A, H, and Q) ACCRUED INTEREST RECEIVABLE Investments Loans RECEIVABLE FROM SWAPS (Notes I, K, and Q) Borrowings Investments Loans OTHER ASSETS Property, furniture, and equipment (Note J) Investment related receivables Swap related collateral (Notes I and Q) Miscellaneous (Note O)	316 $ 20,182 $ 3,630 640 24,452 592 306 49,947 3,177 53,124 36 53,088 819 93 149 242 27,322 7,095 626 35,043 167 3 633 207 1,010 2013	2012
		263 $ 21,697 $ 1,311 770 23,778 348 334 49,937 2,943 52,880 43 52,837 949 108 202 310 29,419 8,510 601 38,530 160 8 2,155 192 2,515

$ 115,868 $ 119,864

TOTAL

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

45

OCR-1

LIABILITIES, CAPITAL, AND RESERVES	LIABILITIES, CAPITAL, AND RESERVES
BORROWINGS (OCR-7) (Notes I, K, and Q) At amortized cost At fair value PAYABLE FOR SWAPS (Notes I, K, and Q) Borrowings Investments Loans PAYABLE UNDER SECURITIES REPURCHASE AGREEMENTS (Note E) ACCOUNTS PAYABLE AND OTHER LIABILITIES Investment related payables Swap related collateral (Notes I and Q) Accrued pension and postretirement medical benefit costs (Note P) Miscellaneous (Notes G, J and O) TOTAL LIABILITIES CAPITAL AND RESERVES (OCR-4) Capital stock (OCR-8) (Note L) Authorized (SDR106,389 – 2013 and 2012) Subscribed (SDR105,720 – 2013; SDR106,140 – 2012) 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 L) Net notional amounts required to maintain value of currency holdings (Note L) Ordinary reserve (Note M) Special reserve (Note M) Loan loss reserve (Note M) Surplus (Note M) Cumulative revaluation adjustments account (Note M) Net income after appropriation (OCR-4) (Note M) Accumulated other comprehensive loss (Note M)	4,258 $ 57,372 61,630 $ 27,341 6,428 578 34,347 602 102 633 1,248 168 2,151 98,730 162,809 154,640 8,169 1,238 6,931 88 6,843 (958) 5,885 (1,390) 11,166 282 261 1,065 (38) 548 (641) 17,138 2013	2012
		5,781 $ 58,999 64,780 $ 25,174 8,282 636 34,092 350 11 2,155 1,876 180 4,222
		103,444 163,129 154,951 8,178 2,082 6,096 86 6,010 (791) 5,219 (888) 10,889 264 194 1,132 284 124 (798) 16,420
TOTAL	115,868 $	119,864 $

46

OCR-2

ASIAN DEVELOPMENT BANK—ORDINARY CAPITAL RESOURCES STATEMENT OF INCOME AND EXPENSES For the Years Ended 31 December 2013 and 2012 Expressed in Millions of US Dollars

REVENUE (Note N) From loans (Note F) Interest 637 $ Commitment charge 46 Other (37) 646 $ From investments (Note D) Interest 339 From guarantees 18 From equity investments 10 From other sources—net (Notes F and R) 22 TOTAL REVENUE 1,035 $ EXPENSES (Note N) Borrowings and related expenses (Note K) 400 Administrative expenses (Includes amount reclassified from other comprehensive income on pension/postretirement net actuarial losses of $101 – 2013 and $63 – 2012) 411 (Write-back) provision for loan losses (Note F) (6) Other expenses 8 TOTAL EXPENSES 813 NET REALIZED GAINS From investments (Notes D and N) (Includes amount reclassified from other comprehensive income on unrealized holding gains of $11 – 2013 and $26 – 2012) 12 From equity investments (Note N) (Includes amount reclassified from other comprehensive income on unrealized holding gains of $106 – 2013 and $88 – 2012) 176 From borrowings 6 NET REALIZED GAINS 194 NET UNREALIZED GAINS (LOSSES) (Note N) 150 2013	REVENUE (Note N) From loans (Note F) Interest 637 $ Commitment charge 46 Other (37) 646 $ From investments (Note D) Interest 339 From guarantees 18 From equity investments 10 From other sources—net (Notes F and R) 22 TOTAL REVENUE 1,035 $ EXPENSES (Note N) Borrowings and related expenses (Note K) 400 Administrative expenses (Includes amount reclassified from other comprehensive income on pension/postretirement net actuarial losses of $101 – 2013 and $63 – 2012) 411 (Write-back) provision for loan losses (Note F) (6) Other expenses 8 TOTAL EXPENSES 813 NET REALIZED GAINS From investments (Notes D and N) (Includes amount reclassified from other comprehensive income on unrealized holding gains of $11 – 2013 and $26 – 2012) 12 From equity investments (Note N) (Includes amount reclassified from other comprehensive income on unrealized holding gains of $106 – 2013 and $88 – 2012) 176 From borrowings 6 NET REALIZED GAINS 194 NET UNREALIZED GAINS (LOSSES) (Note N) 150 2013	2012	2012
		766 $ 48 (44) 770 $ 390 18 39 21 1,238 $ 520 351 7 9 887 26 80 16 122 (331)
NET INCOME	566 $		142 $

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 INCOME (LOSS) For the Years Ended 31 December 2013 and 2012 Expressed in Millions of US Dollars

NET INCOME (OCR-2) Other comprehensive income (loss) (Note M) Currency translation adjustments Unrealized investment holding losses Pension/postretirement liability adjustments	566 $ (162) $ (412) 731 157 2013	2012
		142 $ (38) $ (9) (330) (377)
COMPREHENSIVE INCOME (LOSS)	723 $	(235) $

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 2013 and 2012

Expressed in Millions of US Dollars (Note L)

			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 2012	$	5,237	$	(579)	$	(596)	$	10,460	$	246	$	200	$	1,132	$	261	$	594	$	(421)	$	16,534
Comprehensive loss
for the year 2012 (OCR-3) (Note M)																		142		(377)		(235)
Appropriation of guarantee fees
to Special Reserve (Note M)										18								(18)				–
Change in SDR value of
paid-in shares subscribed		171																				171
Change in subscription
installments not due		588																				588
Additional paid-in shares
subscribed during the year		14																				14
Change in SDR value of
capital transferred to
Asian Development Fund		(0)																				(0)
Change in notional
maintenance of value (Note L)						(292)																(292)
Demand obligations on account
of subscription received
during the year				(264)																		(264)
Encashment of demand
obligations during the year				31																		31
Change in US Dollar value
of demand obligations				21																		21
Allocation of prior year income
to ordinary reserve, cumulative
revaluation account and
transfer from loan loss
reserve (Note M)								417				(6)				23		(434)				–
Allocation of prior year income to ADF
and TASF (Note M)																		(160)				(160)
Charge to ordinary reserve for
change in SDR value of
capital stock (Note M)								5														5
Return of unutilized amount from
ATF to ordinary reserve (Note M)								7														7
Balance, 31 December 2012	$	6,010	$	(791)	$	(888)	$	10,889	$	264	$	194	$	1,132	$	284	$	124	$	(798)	$	16,420
Comprehensive income
for the year 2013 (OCR-3) (Note M)																		566		157		723
Appropriation of guarantee fees
to Special Reserve (Note M)										18								(18)				–
Change in SDR value of
paid-in shares subscribed		190																				190
Change in subscription
installments not due		643																				643
Additional paid-in shares
subscribed during the year		0																				0
Change in SDR value of
capital transferred to
Asian Development Fund		(0)																				(0)
Change in notional
maintenance of value (Note L)						(502)																(502)
Demand obligations on account
of subscription received
during the year				(263)																		(263)
Encashment of demand
obligations during the year				42																		42
Change in US Dollar value
of demand obligations				54																		54
Allocation of prior year income
to ordinary reserve, loan
loss reserve and transfer from
cumulative revaluation account,
surplus (Note M)								278				67		(67)		(322)		44				–
Allocation of prior year income to
ADF, TASF, CCF, RCIF, and
FSDPSF (Note M)																		(168)				(168)
Charge to ordinary reserve for
change in SDR value of
capital stock (Note M)								(1)														(1)
Balance, 31 December 2013	$	6,843	$	(958)	$	(1,390)	$	11,166	$	282	$	261	$	1,065	$	(38)	$	548	$	(641)	$	17,138

Note: 0 = less than $0.5 million.

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 2013 and 2012 Expressed in Millions of US 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 securities purchased under resale arrangements Payments for securities purchased under resale arrangements Principal collected on loans Loans disbursed Receipts from 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 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 Resources transferred to CCF Resources transferred to RCIF Resources transferred to FSDPSF 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 (Write-back) provision for loan losses Net realized gains from investments, equity investments and other borrowings Proportionate share in losses (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	2013 642 $ 374 (1) (445) (281) 36 325 1,394 177,691 (180,135) 97,944 (97,937) 5,126 (5,939) 891 (27) (1,510) (164) 301 (2,365) 14,328 (13,282) 373 (18) 42 816 – (120) (30) (9) (6) (3) 2,091 2 53 263 316 $ 566 $ 121 (6) (194) 6 (150) 5 3 (750) 731 (7) 325 $	2012
		688 $ 398 (1) (517) (246) 31
		353
		756 160,337 (164,332) 113,435 (113,415) 3,258 (6,705) 274 (22) 212 (113) 245
		(6,070)
		18,433 (13,220) 336 (27) 31 388 7 (120) (40) – – –
		5,788
		4
		75 188
		263 $
		142 $ 63 7 (122) (34) 331 (72) 3 364 (330) 1
		353 $

Supplementary disclosure of noncash financing activities:

1 Nonnegotiable, noninterest-bearing demand promissory notes amounting to $263 million ($263 million – 2012) 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 2013 and 2012

Expressed in Millions of US Dollars

31 December 2013 and 2012 Expressed in Millions of US Dollars
Borrowers/Guarantors	Loans Outstanding1	Undisbursed Balances of Effective Loans2	Loans Not Yet Effective3	Total Loans	Percent of Total Loans
Armenia Azerbaijan Bangladesh Bhutan Cambodia China, People's Republic Cook Islands Fiji Georgia India Indonesia Kazakhstan Kyrgyz Republic Lao People's Democratic Republic Malaysia Maldives Marshall Islands Micronesia, Federated States of Mongolia Pakistan Palau Papua New Guinea Philippines Sri Lanka Thailand Timor-Leste Turkmenistan Uzbekistan Viet Nam Regional TOTAL – 31 December 2013 Allowance for loan losses Unamortized loan origination cost—net NET BALANCE – 31 December 2013 Made up of: Sovereign Loans Nonsovereign Loans Private Sector Public Sector Net Balance – 31 December 2013 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	124 $ 563 1,635 51 – 13,886 28 139 132 12,112 8,577 1,115 10 55 94 3 1 4 – 4,942 13 252 4,102 1,095 769 4 72 1,069 2,178 53,025 26 53,051 (36) 73 53,088 $ 49,947 $ 2,782 359 53,088 $ 52,814 $ (43) 66 52,837 $ 49,937 $ 2,613 287 52,837 $	173 $ 759 1,030 – – 5,206 0 14 232 5,486 943 478 – – – – – 6 – 1,436 – 196 708 708 205 27 45 1,388 2,847 21,887 20 21,907 – – 21,907 $ 20,472 $ 897 538 21,907 $ 21,792 $ 21,792 $ 20,070 $ 1,166 556 21,792 $	100 $ 150 534 – 75 1,987 – – 73 2,753 764 561 – – – – – – 117 1,037 27 184 872 140 – 40 – 293 500 10,207 20 10,227 – – 10,227 $ 8,645 $ 1,526 56 10,227 $ 8,708 $ 8,708 $ 7,439 $ 1,214 55 8,708 $	397 $ 1,472 3,199 51 75 21,079 28 153 437 20,351 10,284 2,154 10 55 94 3 1 10 117 7,415 40 632 5,682 1,943 974 71 117 2,750 5,525 85,119 66 85,185 (36) 73 85,222 $ 79,064 $ 5,205 953 85,222 $ 83,314 $ (43) 66 83,337 $ 77,446 $ 4,993 898 83,337 $	0.47 1.73 3.77 0.06 0.09 24.74 0.03 0.18 0.51 23.89 12.07 2.53 0.01 0.06 0.11 0.00 0.00 0.01 0.14 8.70 0.05 0.74 6.67 2.28 1.14 0.08 0.14 3.23 6.49
					99.92 0.08
					100.00

• 0 = less than $0.5 million.

• 1 Amounts outstanding on the multicurrency fixed lending rate is nil ($6 million – 2012), on pool-based loans totaled $4,196 million ($5,694 million – 2012) and on LIBOR-based loans, market-based and local currency loans totaled $48,855 million ($47,113 million – 2012). The average yield on loans was 1.31% (1.56% – 2012).

2 Refer to the unwithdrawn portions of effective loans as of 31 December 2013. Of the undisbursed balances, ADB has made irrevocable commitments to disburse various amounts totaling $282 million ($635 million – 2012).

3 Refer to approved loans that have not become effective as of 31 December 2013, 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 AS OF 31 DECEMBER 2013

Twelve Months Ending 31 December 2014 2015 2016 2017 2018	Amount 4,069 $ 3,673 4,376 4,172 4,175	Five Years Ending 31 December 2023 2028 2033 2038 over 2038 Total	Amount
			20,259 16,394 12,583 4,752 505
			74,958 $

SUMMARY OF CURRENCIES RECEIVABLE ON LOANS OUTSTANDING

Currency		2013		2012
Yuan	$	337	$	259
Euro		47		58
Yen		2,323		3,401
Indian rupee		112		138
Rupiah		31		47
Tenge		144		148

Currency	2013 2012
New Zealand dollar Pakistan rupee Philippine peso Swiss franc Baht US dollar Total	28 – – 0 3 63 – 1 240 190 49,786 48,509
	53,051 $ 52,814 $

0 = less than $0.5 million.

52

ASIAN DEVELOPMENT BANK—ORDINARY CAPITAL RESOURCES SUMMARY STATEMENT OF BORROWINGS 31 December 2013 and 2012 Expressed in Millions of US Dollars

	Borrowings	Borrowings	Swap Arrangements2	Swap Arrangements2	2013 2012 Net Currency Obligation3	2013 2012 Net Currency Obligation3	After Swaps Average Cost (%)
	Principal Outstanding1		Payable(Receivable)3
	2013	2012	2013	2012	2013
Australian dollar Brazilian real Canadian dollar Yuan Indian rupee Yen Ringgit Mexican peso New Zealand dollar Norwegian krone Pound sterling Singapore dollar South African rand Swiss franc Baht Turkish lira US dollar Subtotal Unamortized discounts/ premiums ASC 815 Adjustments Total	9,418 $ 1,248 884 570 82 2,383 158 333 1,148 419 2,648 387 1,017 1,038 33 2,527 37,322 61,615 15 61,630 $	10,969 $ 1,082 1,819 543 93 3,273 178 22 606 528 1,695 – 2,039 1,017 36 3,248 37,614	(9,396) $ (1,246) (899) 51 (38) 1 – 3,166 (2,281) (159) (374) (1,146) (418) (2,637) (387) (1,015) (550) (33) (2,526) 24,123 (4,217)	(10,919) $ (1,079) (1,838) 43 (44) 3 (0) 2,601 (2,815) (177) (22) (603) (526) (1,693) – (2,034) (580) (36) (3,237) 22,526 (3,815)	22 $ 2 (15) 583 83 3,268 (1) (41) 2 1 11 – 2 488 – 1 57,228	50 $ 3 (19) 542 96 3,059 1 0 3 2 2 – 5 437 (0) 11 56,325 60,517 $	0.64 (0.13) 0.51
		64,762 18	19 $	(4,245) $	61,634 $
		64,780 $

0 = less than $0.5 million.

1 Includes accrued interest and commission. Reported at fair value except for unswapped borrowings which are reported at principal amount net of unamortized discount/premium. The aggregate face amounts and discounted values of zero coupon and deep discount borrowings (in US dollar equivalents) are:

	Currency	Aggregate F	ace Amount	Discount	ed Value
		2013 410 $ 320 – 816 551 1,526 226 3,920	2012	2013	2012
	Australian dollar Brazilian real Canadian dollar South African rand Swiss franc Turkish lira Mexican peso US dollar		1,005 $ 231 802 1,203 535 1,980 – 4,121	305 $ 266 – 728 495 1,360 164 2,432	860 $ 194 795 1,032 457 1,626 – 2,688

53

OCR-7

MATURITY STRUCTURE OF BORROWINGS OUTSTANDING AS OF 31 DECEMBER 2013[4]

Twelve Months Ending 31 December 2014 2015 2016 2017 2018	Amount 13,265 $ 12,269 12,833 8,677 6,610	Five Years Ending 31 December 2023 2028 2033 over 2033 Total	Amount
			5,302 2,377 297 –
			61,630 $

INTEREST RATE SWAP ARRANGEMENTS AS OF 31 DECEMBER 2013

Receive Fixed Swaps: Australian dollar7 Yuan Indian rupee US dollar US dollar8 Receive Floating Swaps: Yen US dollar Total	Notional Amount	Average Rate(%) Pay Maturing Receive Floating5 Through6	Average Rate(%) Pay Maturing Receive Floating5 Through6
		Receive
	48 $ 288 81 30,889 48 48 3,211	2.64 3.52 5.40 2.06 2.14 4.12 0.27	(0.14) 2027-2032 3.87 2015-2020 8.12 2014 0.29 2014-2020 (0.17) 2016-2027 (0.17) 2016-2032 0.17 2014-2018
	34,613 $

• 2 Include currency and interest rate swaps. At 31 December 2013, the remaining maturity of swap agreements range from less than one year to 20 years. Approximately 79.81% of the swap receivables and 81.12% of the payables are due before 1 January 2019.

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

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

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

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

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

• 8 Consists of dual currency swaps with interest receivable in US dollar and interest payable in 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 2013

Expressed in Millions of US 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 0.034 55.2 $ 47.8 $ 7.4 $ Armenia 31,671 0.300 487.7 463.3 24.4 Australia 614,220 5.810 9,459.0 8,985.9 473.0 Azerbaijan 47,208 0.447 727.0 690.6 36.4 Bangladesh 108,384 1.025 1,669.1 1,585.6 83.5 Bhutan 660 0.006 10.2 9.5 0.6 Brunei Darussalam 37,386 0.354 575.7 546.9 28.8 Cambodia 5,250 0.050 80.9 74.1 6.7 China, People's Republic of 684,000 6.470 10,533.6 10,006.8 526.8 Cook Islands 282 0.003 4.3 4.1 0.2 Fiji 7,218 0.068 111.2 105.6 5.6 Georgia 36,243 0.343 558.1 530.2 28.0 Hong Kong, China 57,810 0.547 890.3 845.7 44.5 India 672,030 6.357 10,349.3 9,831.7 517.6 Indonesia 546,873 5.173 8,421.8 7,995.9 426.0 Japan 1,656,630 15.670 25,512.1 24,236.2 1,275.9 Kazakhstan 85,608 0.810 1,318.4 1,252.4 65.9 Kiribati 426 0.004 6.6 6.2 0.3 Korea, Republic of 534,738 5.058 8,235.0 7,823.2 411.8 Kyrgyz Republic 31,746 0.300 488.9 464.4 24.5 Lao People’s Democratic Republic 1,476 0.014 22.7 21.3 1.4 Malaysia 289,050 2.734 4,451.4 4,228.7 222.6 Maldives 426 0.004 6.6 6.2 0.3 Marshall Islands 282 0.003 4.3 4.1 0.2 Micronesia, Federated States of 426 0.004 6.6 6.2 0.3 Mongolia 1,596 0.015 24.6 23.3 1.2 Myanmar 57,810 0.547 890.3 845.7 44.5 Nauru 426 0.004 6.6 6.2 0.3 Nepal 15,606 0.148 240.3 228.3 12.0 New Zealand 163,020 1.542 2,510.5 2,385.0 125.5 Pakistan 231,240 2.187 3,561.1 3,383.0 178.1 Palau 342 0.003 5.3 5.0 0.3 Papua New Guinea 9,960 0.094 153.4 145.7 7.7 Philippines 252,912 2.392 3,894.8 3,700.1 194.8 Samoa 348 0.003 5.4 5.0 0.3 Singapore 36,120 0.342 556.2 528.4 27.8 Solomon Islands 708 0.007 10.9 10.4 0.5 Sri Lanka 61,560 0.582 948.0 900.6 47.4 Taipei,China 115,620 1.094 1,780.5 1,691.5 89.0 Tajikistan 30,402 0.288 468.2 444.7 23.5 Thailand 144,522 1.367 2,225.6 2,114.3 111.3 Timor-Leste 1,050 0.010 16.2 15.4 0.8 Tonga 426 0.004 6.6 6.2 0.3 Turkmenistan 26,874 0.254 413.9 393.1 20.7 Tuvalu 150 0.001 2.3 2.2 0.1 Uzbekistan 71,502 0.676 1,101.1 1,046.1 55.1 Vanuatu 708 0.007 10.9 10.4 0.5 Viet Nam 36,228 0.343 557.9 521.7 36.2			43,032 0.326 71,118 0.538 653,667 4.946 86,655 0.656 147,831 1.119 40,107 0.303 76,833 0.581 44,697 0.338 723,447 5.474 39,729 0.301 46,665 0.353 75,690 0.573 97,257 0.736 711,477 5.384 586,320 4.437 1,696,077 12.835 125,055 0.946 39,873 0.302 574,185 4.345 71,193 0.539 40,923 0.310 328,497 2.486 39,873 0.302 39,729 0.301 39,873 0.302 41,043 0.311 97,257 0.736 39,873 0.302 55,053 0.417 202,467 1.532 270,687 2.048 39,789 0.301 49,407 0.374 292,359 2.212 39,795 0.301 75,567 0.572 40,155 0.304 101,007 0.764 155,067 1.173 69,849 0.529 183,969 1.392 40,497 0.306 39,873 0.302 66,321 0.502 39,597 0.300 110,949 0.840 40,155 0.304 75,675 0.573
Total Regional(Forward) 6,712,758 63.496 103,376.5 98,185.4 5,191.1			8,606,214 65.125

55

OCR-8

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)	6,712,758 63.496 103,376.5 98,185.4 5,191.1		8,606,214 65.125
NONREGIONAL Austria Belgium Canada Denmark Finland France Germany Ireland Italy Luxembourg The Netherlands Norway Portugal Spain Sweden Switzerland Turkey United Kingdom United States	36,120 0.342 556.2 528.4 27.8 36,120 0.342 556.2 528.4 27.8 555,258 5.252 8,551.0 8,123.3 427.6 36,120 0.342 556.2 528.4 27.8 36,120 0.342 556.2 528.4 27.8 247,068 2.337 3,804.8 3,614.6 190.3 459,204 4.344 7,071.7 6,718.1 353.7 36,120 0.342 556.2 528.4 27.9 191,850 1.815 2,954.5 2,806.7 147.8 36,120 0.342 556.2 528.4 27.9 108,882 1.030 1,676.8 1,592.9 83.9 36,120 0.342 556.2 528.4 27.8 12,040 0.114 185.4 172.4 13.0 36,120 0.342 556.2 528.4 27.8 36,120 0.342 556.2 528.4 27.8 61,950 0.586 954.0 906.3 47.7 36,120 0.342 556.2 528.4 27.8 216,786 2.051 3,338.5 3,171.6 167.0 1,645,007 15.560 25,333.1 24,064.4 1,268.7		75,567 0.572 75,567 0.572 594,705 4.500 75,567 0.572 75,567 0.572 286,515 2.168 498,651 3.773 75,567 0.572 231,297 1.750 75,567 0.572 148,329 1.122 75,567 0.572 51,487 0.390 75,567 0.572 75,567 0.572 101,397 0.767 75,567 0.572 256,233 1.939 1,684,454 12.747
Total Nonregional	3,859,245 36.504 59,432.4 56,454.5 2,977.9		4,608,738 34.875
TOTAL	10,572,003 100.000 162,808.8 154,639.9 8,168.9		13,214,952 100.000

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 2013 was $1.54000. (Notes B and L)

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

56

OCR-9

ASIAN DEVELOPMENT BANK—ORDINARY CAPITAL RESOURCES NOTES TO FINANCIAL STATEMENTS 31 December 2013 and 2012

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 R). 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 exclusive of the special reserve. At 31 December 2013, the total of such loans, equity investments, and guarantees aggregated approximately 31.1% (31.0% – 2012) of the total subscribed capital, reserves, and surplus exclusive of the special reserve.

Article 12, paragraph 3 of the Charter provides that equity investments shall not exceed 10% of the unimpaired paid-in capital actually paid up at any given time together with reserves and surplus, exclusive of the special reserve. At 31 December 2013, such equity investments represented approximately 8.1% (8.4% – 2012) 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 OCR are prepared in accordance with accounting principles generally accepted in the United States of America (US GAAP).

57

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continued

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 US dollar.

Translation of Currencies

ADB adopts the use of daily exchange rates for accounting and financial reporting purposes. This allows transactions in currencies other than the US dollar 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-US dollar currencies 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 N) and to the maintenance of special drawing right (SDR) capital values (Notes L and M), are charged or credited to Accumulated translation adjustments and reported in CAPITAL AND RESERVES as part of Accumulated other comprehensive loss.

Valuation of Capital Stock

The authorized capital stock of ADB is defined in Article 4, paragraph 1 of the Charter “in terms of US dollars of the weight and fineness in effect on 31 January 1966” (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 US 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 US dollars as determined by the IMF, with each share valued at SDR10,000.

As of 31 December 2013, the value of the SDR in terms of the US dollar was $1.54000 ($1.53692– 2012) giving a value for each share of ADB’s capital equivalent to $15,400.00 ($15,369.20– 2012).

Derivative Financial Instruments

ADB reports all derivative transactions in accordance with Accounting Standards Codification (ASC) 815, “Derivatives and Hedging.” 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. ADB records derivatives in the Balance Sheet as either assets or liabilities measured at fair value, consistent with the legal rights and way the instruments are settled. Individual interest rate swaps under the Master Agreement of the International Swaps and Derivatives Association (ISDA), absent of local market constraints, are recorded on a net basis, while all other swaps, including cross currency and foreign exchange swaps, are recorded on a gross basis.

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 loss. Realized gains and losses are measured by the difference between amortized cost and the net proceeds of sales and are reported in the Statement of Income and Expenses under NET REALIZED GAINS 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.” 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 have 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 the 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 is not impaired or subject to collective provision is recorded as loss reserve in the CAPITAL AND RESERVES of the balance sheet. Any adjustment to loan loss reserve following this methodology is subject to the approval of the Board of Governors.

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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 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. A front-end fee 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 ACCOUNTS PAYABLE AND OTHER LIABILITIES - Miscellaneous 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. 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 I 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 loss. ADB reports equity investments with associated derivatives at fair value, with changes in fair value reported in net income as part of NET UNREALIZED GAINS (LOSSES).

ADB applies the equity method of accounting to investments where it has the ability to exercise significant 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

Investments in equity securities without readily determinable fair values are reported at cost or at written down value. ADB has determined that it is not practicable to estimate the fair value of equity investments reported at cost or written down. 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.

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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 as 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 VIEs where ADB holds variable interest (see Note S).

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 a source to provide funds for ADB’s operations. ADB diversifies its funding sources across markets, instruments, and maturities. In conjunction, ADB uses currency and interest rate swaps for asset and 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, “Fair Value Measurement” 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.

The Fair Value Option

ADB has adopted the Fair Value Option subsections of ASC 825, “Financial Instruments” (ASC 825 or the Fair Value Option). ASC 825 permits the measurement of eligible financial assets, financial liabilities and firm commitments at fair value on an instrument-by-instrument basis, that are not otherwise permitted to be accounted for at fair value under other accounting standards. The election to use the Fair Value Option is available when an entity first recognizes a financial asset or liability or upon entering into a firm commitment.

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 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.

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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 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 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 December 2011, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2011-11, “Balance Sheet (Topic 210) – Disclosures about Offsetting Assets and Liabilities,” to provide enhanced disclosures that will enable users of the financial statements to evaluate the effect or potential effect of netting arrangements on an entity’s financial position. Subsequently, FASB issued ASU 2013-01 in January 2013 to clarify the scope of ASU 2011-11. The update is applicable for ADB’s derivative instruments and securities transferred under repurchase agreements which are subject to an enforceable master netting agreement. ADB does not offset its recognized receivable from and payable for swaps for multiple transactions with the same counterparty under the master netting agreement and reports the gross amounts for the receivable from and payable for swaps and securities transferred under repurchase agreements and related payable under securities repurchase agreements at their gross amounts. See Notes E and I for the required disclosures.

In February 2013, the FASB issued ASU 2013-02, “Comprehensive Income (Topic 220) – Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income,” to improve the reporting of reclassifications out of accumulated other comprehensive income. The amendments are effective from quarter ended 31 March 2013 for ADB. See OCR-3 and Note M for the required disclosures.

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In February 2013, the FASB issued ASU 2013-04, “Liabilities (Topic 405) – Obligations Resulting from Joint and Several Liability Arrangements for Which the Total Amount of the Obligation is Fixed at the Reporting Date,” to provide guidance for the recognition, measurement, and disclosure of obligations resulting from joint and several liability arrangements for which the total amount of the obligation within the scope of this Update is fixed at the reporting date. The amendments are effective for fiscal years beginning after 15 December 2013 and the ASU is not expected to impact OCR’s financial statements.

In March 2013, the FASB issued ASU 2013-05, “Foreign Currency Matters (Topic 830) – Parent’s Accounting for the Cumulative Translation Adjustment upon Derecognition of Certain Subsidiaries or Groups of Assets within a Foreign Entity or of an Investment in a Foreign Entity,” to provide guidance on whether to release cumulative translation adjustments on certain derecognition events. An entity is required to apply the amendments prospectively for fiscal years beginning after 15 December 2013. ADB is currently assessing the impact of this update on OCR’s financial statements.

In April 2013, the FASB issued ASU 2013-07, “Presentation of Financial Statements (Topic 205) – Liquidation Basis of Accounting,” to require an entity to prepare its financial statements using the liquidation basis of accounting when liquidation is imminent. The amendments are effective for entities that determine liquidation is imminent during annual reporting periods beginning after 15 December 2013, and interim reporting periods therein. This ASU is not expected to impact OCR’s financial statements.

In December 2013, the FASB issued ASU 2013-12 "Definition of a Public Business Entity - An Addition to the Master Glossary" to define public business entity in the Master Glossary of the FASB Accounting Standards Codification. The amendment does not affect existing requirements. There is no actual effective date for the amendment. However, the new definition will be applied to all new Accounting Standards Updates issued in 2014 and onwards that will use the term public business entity . ADB is assessing the impact of this update on OCR’s financial statements.

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 2013 (42 – 2012), cash in banks (due from banks) totaling $97 million ($72 million – 2012) may be, but are not currently so restricted.

In accordance with Article 24, paragraphs 2(i) and (ii) of the Charter, no member (nil – 2012) 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.

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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.

ADB may purchase and sell exchange traded 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.

Included in Other securities as of 31 December 2013 were corporate obligations and debt securities amounting to $640 million ($770 million – 2012).

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 2013 were securities transferred under securities lending arrangements of government or government-guaranteed obligations totaling $45 million ($92 million – 2012).

The currency composition of the investment portfolio as of 31 December 2013 and 2012 expressed in US dollars was as follows:

($million)
Currency US dollar Yen Won Euro Australian dollar Canadian dollar Ringgit Swiss franc New Zealand dollar Others Total	2013 2012 13,039 $ 11,243 $ 7,073 7,935 854 991 789 785 645 803 402 421 386 282 341 346 301 348 622 624 24,452 $ 23,778 $

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The estimated fair value and amortized cost of the investments by contractual maturity at 31 December 2013 and 2012 were as follows:

($million)
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 12,954 $ 12,934 $ 10,523 10,406 962 968 13 9 24,452 $ 24,317 $ 2013	2012
	Estimated Fair Value 12,954 $ 10,523 962 13 24,452 $	Estimated Amortized Fair Value Cost 10,044 $ 10,026 $ 12,269 11,964 1,352 1,320 113 94 23,778 $ 23,404 $

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

($million)
2013 2012 As of 31 December Amortized cost 20,687 $ 22,092 $ Estimated fair value 20,822 22,467 Gross unrealized gains 206 382 Gross unrealized losses (71) (7) For the years ended 31 December: Change in net unrealized gains from prior year (240) 1 Proceeds from sales 1,399 774 Gross gain on sales 13 27 Gross loss on sales (1) (0)
0 = less than$0.5 million

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The table below provides a listing of investments that sustained unrealized losses as of 31 December 2013. Three government or government-guaranteed obligations (six – 2012), no debt security (one – 2012), and 16 corporate obligations (nil – 2012) sustained unrealized losses for over one year, representing 0.44% (2.59% – 2012) of the total investments. Comparative details for 2013 and 2012 are as follows:

($million)
For the year 2013 Government or government- guaranteed obligations Other securities Corporate obligations Debt security Total	Oneyear or less		Over o	neyear	Total
	Fair Value	Unrealized Losses	Fair Value	Unrealized Losses	Fair Unrealized Value Losses 6,726 $ 67 $ 268 4 – – 6,994 $ 71 $
	6,632 $ 255 –	63 $ 4 –	94 $ 13 –	5 $ 0 –
	6,887 $	67 $	107 $	5 $
0 = less than $0.5 million
($million)
For the year 2012 Government or government- guaranteed obligations Other securities Corporate obligations Debt security Total	Oneyear or less		Over o	neyear	Total
	Fair Value	Unrealized Losses	Fair Value	Unrealized Losses	Fair Unrealized Value Losses 6,691 $ 7 $ 50 0 5 0 6,746 $ 7 $
	6,081 $ 50 –	2 $ 0 –	610 $ – 5	5 $ – 0
	6,131 $	2 $	615 $	5 $
0 = less than $0.5 million

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Fair Value Disclosure

The fair value of INVESTMENTS and related financial assets as of 31 December 2013 and 2012 was as follows:

($million)
Investments Government or government-guaranteed obligations Time deposits	31 December 2013 20,182 $ 3,630	Fair Value Measurements
		Level 1 17,877 $ –	Level 2 2,305 $ 3,630	Level 3
				– $ –
Other securities Securities transferred under repurchase agreements Securities purchased under resale arrangements	640 592 306	630 592 –	10 – 306	– – –
Total at fair value ($million)	25,350 $	19,099 $	6,251 $	– $
Investments Government or government-guaranteed obligations Time deposits Other securities Securities transferred under repurchase agreements Securities purchased under resale arrangements Total at fair value	31 December 2012 21,697 $ 1,311 770 348 334 24,460 $	Fair Value Measurements
		Level 1 18,896 $ – 616 348 – 19,860 $	Level 2 Level 3 2,700 $ 101 $ 1,311 – 150 4 – – 334 – 4,495 $ 105 $

If available, active market quotes are used to assign fair values to investment securities and related financial assets. These include most government or government-guaranteed obligations, corporate obligations, and other debt securities. Investments and related financial assets where active market quotes are not available 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 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 and financial assets. 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.

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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 a 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 inputs used as of 31 December 2012. There were no investments categorized as Level 3 as of 31 December 2013.

31 December 2012 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%)

The table below provides the details of transfers between Levels 1 and 2 for the years ended 31 December 2013 and 2012:

($million)
Investments	Level 1 Level 2 2013		2012
	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	44 $ – 12 –	(44) $ – (12) –	101 $ (27) 20 (14)	(101) $ 27 (20) 14
	56 $	(56) $	80 $	(80) $

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 ADB’s Level 3 investments for the years ended 31 December 2013 and 2012:

($ million)

($million)
Balance, 1 January 2013	Investments
	Government or gov't.-guaranteed obligations 101 $	Corporate obligations
		4 $
Total gains (losses) - (realized/unrealized) Included in earningsa Included in other comprehensive income (OCR-3) Currency translation adjustments Unrealized investment holding losses Purchases Sales/Maturities Settlement and others Transfers into Level 3	– – (1) – (100) – –	– – – – – – –
Transfers out of Level 3 Balance, 31 December 2013	– – $	(4)
		– $
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	– $	– $
aIncluded in income from Investments (OCR-2). bIncluded in unrealized investment holding gains (losses) for the period (Note M).

($ million)

Balance, 1 January 2012 Total gains (losses) - (realized/unrealized) Included in earningsa Included in other comprehensive income (OCR-3) Currency translation adjustments Unrealized investment holding losses Purchases Sales/Maturities Settlement and others Transfers into Level 3 Transfers out of Level 3 Balance, 31 December 2012 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

Investments

Government or gov't.-guaranteed obligations Corporate obligations 203 $ 5 $ – 0 0 – (0) 0 – 4 (8) (5) – – – – (94) – 101 $ 4 $ (0) $ 0 $

a Included in income from Investments (OCR-2).

b Included in unrealized investment holding gains (losses) for the period (Note M). 0 = less than $0.5 million

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There was one corporate obligation transferred out of Level 3 for the year ended 31 December 2013 (nil – 2012). Transfers out of Level 3 in 2012 were attributed to the availability of observable inputs. 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—SECURITIES TRANSFERRED UNDER REPURCHASE AGREEMENTS

ADB has entered into Global Master Repurchase Agreements with counterparties in which ADB agrees to transfer securities under repurchase agreements. The agreements provide for the right of a party to terminate if any of the various events of default and termination events specified occur and includes provisions to offset the sum due from one party against the sum due from the other.

The gross amounts of PAYABLE UNDER SECURITIES REPURCHASE AGREEMENTS subject to enforceable master netting agreements presented in the balance sheet as of 31 December 2013 and 2012 are summarized below. (See Note I for Derivative Instruments.)

($million)
		(c)=(a)-(b) Financial instruments Collateral pledged As of 31 December 2013 (b) Gross amounts not offset in the balance sheet Net amount	As of 31 December 2012
	(a)		(a) (c)=(a)-(b) (b)
	Gross amount of liabilities presented in the balance sheet		Financial instruments Collateral pledged Gross amount of liabilities presented in the balance sheet Gross amounts not offset in the balance sheet Net amount
Payable under securities repurchase agreements Total	602 $	592 $ – $ 10 $ 592 $ – $ 10 $	350 $ 348 $ – $ 2 $
	602 $		350 $ 348 $ – $ 2 $

NOTE F—LOANS

Loans

The carrying amount and estimated fair value of loans outstanding at 31 December 2013 and 2012 were as follows:

($million)
Carrying Estimated Value Fair Value Fixed rate multicurrency loans – $ – $ Pool-based single currency loans (yen) 743 744 Pool-based single currency loans (US$) 3,453 4,009 LIBOR-based loansa 48,031 48,259 Local currency loans 861 858 Total 53,088 $ 53,870 $ aThis includes market-based loans and Countercyclical Support Facility loans. 2013	2013		2012
	Carrying Value	Estimated Fair Value	Carrying Estimated Value Fair Value 5 $ 6 $ 1,301 1,305 4,394 5,272 46,304 46,639 833 860 52,837 $ 54,082 $
	– $ 743 3,453 48,031 861	– $ 744 4,009 48,259 858
	53,088 $	53,870 $
		Facility loans.

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

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ADB introduced LIBOR-based loans (LBLs) in the following currencies – US dollar, euro, and yen on 1 July 2001. 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 loans (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 2013, four (five – 2012) sovereign loans totaling $875 million ($2,375 million – 2012) were outstanding.

During 2013, ADB received prepayments for 35 loans (10 loans – 2012) amounting to $665 million ($61 million – 2012), of which $470 million was for sovereign loans (nil – 2012).

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 2013 and 2012 is summarized below:

($million)
Interest w aiver Commitment charge w aiver Total	2013	2012
	59 $	64 $
	1	1
	60 $	65 $

Loans in Non-accrual Status

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

There were no nonsovereign loans in non-accrual status as of 31 December 2013 (one in 2012 with principal outstanding and overdue of $18 million). There were no sovereign loans in non-accrual status in 2013 and 2012.

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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 2013 and 2012 is as follows:

($ million)

2013 Sovereign Loans Nonsovereign Loans Total Allowance for loan losses Unamortized direct loan origination fees—net Loans Outstanding 2012 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
	– $ –	– $ –	– $ –	49,849 $ 3,202	49,849 $ 3,202 $
	– $	– $	– $	53,051 $	53,051 (36) 73
	– $ –	– $ 19	– $ 19	49,846 2,949
					53,088 $
					49,846 $ 2,968
	– $	19 $	19 $	52,795 $	52,814 (43) 66
					52,837 $

As of 31 December 2013 and 2012, 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 borrower as of 31 December 2013 are shown in OCR-6. The carrying amounts of loan outstanding by loan products at 31 December 2013 and 2012 were as follows:

($million)
Sovereign Loans Fixed rate multicurrency loans Pool-based single currency loans (yen) Pool-based single currency loans (US$) 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	2013 2012 – $ 6 $ 743 1,300 3,453 4,394 45,509 43,998 144 148 49,849 49,846 – – 98 91 98 91 49,947 49,937 2,479 2,270 723 698 – 0 3,202 2,968 (36) (43) (25) (25) (61) (68) 3,141 2,900 53,088 $ 52,837 $
0 = less than $0.5 million

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 – 2012). There was no accumulated loan loss provision for sovereign loans as of 31 December 2013 and 2012.

A total of $7 million in write back was made for nonsovereign loans ($8 million provision – 2012) consisting of $4 million provision ($12 million – 2012), $10 million write back ($5 million write back – 2012), and $1 million favorable translation adjustment ($1 million unfavorable – 2012).

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The changes in the allowance for loan losses during 2013 and 2012 as well as information pertaining to loans which were subject to specific allowance for loan losses were as follows:

($million)
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		2013			2012
	Sovereign Loans	Nonsovereign Loans	Total	Sovereign Loans	Nonsovereign Loans Total 35 $ 35 $ 12 12 (5) (5) 1 1 43 $ 43 $ 13 $ 13 $ 30 $ 30 $ 2,968 $ 52,814 $ 49 $ 49 $ 2,919 $ 2,919 $
	– $ – – –	43 $ 4 (10) (1)	43 $ 4 (10) (1)	– $ – – –
	– $	36 $	36 $	– $
	– $ – $ 49,849 $	7 $ 29 $ 3,202 $	7 $ 29 $ 53,051 $	– $ – $ 49,846 $
	– $ – $	26 $ 3,176 $	26 $ 3,176 $	– $ – $
0 = less than$0.5 million

Loans subject to provisioning with related allowance for loan losses during 2013 and 2012 were as follows:

($ million)
Sovereign Loans Nonsovereign Loans		2013			2012
	Recorded Loan Receivable	Unpaid Principal balance	Related allowance	Recorded Loan Receivable	Unpaid Principal balance Related allowance – $ – $ 19 13
	– $ 26	– $ –	– $ 7	– $ 49

No loans were modified or restructured for the years ended 31 December 2013 and 2012.

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 credit risk for lending operations through continuous monitoring of creditworthiness of the borrowers and the 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 $26 million in nonsovereign loans that were considered impaired ($49 million in nonsovereign loans – 2012).

($ million)

($million)	($million)	($million)	($million)	($million)	($million)
Risk Class	Risk Rating	2013 2012 Sovereign Loans		Nonsovereign Loans
		2013		2013	2012
Low credit risk Medium credit risk High credit risk Total	1–5 (AAA to BBB–) 6–11 (BB+ to B–) 12–14 (CCC+ to D)	38,672 $	34,359 $	1,103 $	940 $
		6,485	10,465	1,787	1,700
		4,692	5,022	312	328
		49,849 $	49,846 $	3,202 $	2,968 $

As of 31 December 2013, 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 $55,650 million ($55,987 million – 2012).

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 2013 and 2012, all loans are carried at amortized cost.

Fair valuation is based on internal discounted cash flow models in which expected cash flows are discounted at applicable market yield curves, plus ADB's lending spread, reduced by the specific and collective provisions. 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 2013 and 2012 was as follows:

($million)
Level 1 Level 2 Level 3 Total loans at fair value	2013 2012 – $ – $ 46,719 45,290 7,151 8,792 53,870 $ 54,082 $

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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/or 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 2013 and 2012 were as follows:

($million)
Sovereign loans Nonsovereign loans Total	2013	No.of Loans 49 12 61	2012
	Amount 1,263 $ 640 1,903 $		No.of Amount Loans 1,182 $ 44 281 8 1,463 $ 52

NOTE G—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; (ii) political risk guarantees, which provide coverage against well-defined country risk events; and (iii) guarantees for certain trade-related obligations. 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 up to 2 years for short term programs and 10 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.

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The committed and outstanding amounts of these guarantee obligations as of 31 December 2013 and 2012 covered:

($million)
Partial Credit Guarantees Trade Related with counterguarantee without counterguarantee Non-Trade Related with counterguarantee without counterguarantee Subtotal Political Risk Guarantees with counterguarantee without counterguarantee Subtotal Total	Committed Outstanding Amount Amount 142 $ 142 $ 694 453 836 595 1,031 962 171 41 1,202 1,003 2,038 1,598 203 144 61 38 264 182 2,302 $ 1,780 $ 2013	2012
	Committed Amount 142 $ 694 836 1,031 171 1,202 2,038 203 61 264 2,302 $	Committed Outstanding Amount Amount 250 $ 250 $ 631 304 881 554 1,200 1,170 190 11 1,390 1,181 2,271 1,735 262 137 81 33 343 170 2,614 $ 1,905 $

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 2013, a total liability of $32 million ($22 million – 2012) relating to stand-by ready obligation for six partial credit risk guarantees (three – 2012) and three political risk guarantees (three – 2012) 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 2013 and 2012, 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 inputs such as discount rates applicable to individual guarantee contracts that are internally determined and are classified as Level 3. An increase in discount rates generally results in a decrease in the fair value of the guarantees.

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The valuation technique and quantitative information regarding significant unobservable inputs for guarantee receivable/guarantee liabilities classified as Level 3 as of 31 December 2013 and 2012 are presented below:

31 December 2013 Guarantee receivable/ Guarantee liability 31 December 2012 Guarantee receivable/ Guarantee liability	Valuation Technique Discounted cash flows Valuation Technique Discounted cash flows	Unobservable Inputs Average Range Discount rates 3.04% to 5.37% (3.7%) Unobservable Inputs Average Range Discount rates 3.04% to 5.37% (3.7%)

The following table presents the changes in the carrying amounts of ADB’s Level 3 future guarantee receivable/liability for the years ended 31 December 2013 and 2012:

($million)	Guarantee Receivable/Liability	Guarantee Receivable/Liability
	2013	2012
Balance, 1 January Issuances	22 $ 25 (15) 32 $	14 $ 21 (13) 22 $
Amortization
Balance, 31 December

Note: There were no realized/unrealized gains and losses included in earnings and other comprehensive income.

NOTE H—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 reported: (i) at fair value; (ii) under the equity method; and (iii) at cost or written down value as follows:

($ million)

Equity method Cost method Fair value method Total	2013 2012 523 $ 484 $ 176 194 120 271 819 $ 949 $

Equity investments with readily determinable fair values that are not accounted for under the equity method are reported at fair value. As of 31 December 2013, these included three (four – 2012) equity investments which were classified as available for sale totaling $114 million ($271 million – 2012) and one equity investment with associated derivative amounting to $6 million.

There was one equity investment that sustained unrealized losses in 2013 (one – 2012).

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

($million)
As of 31 December Amortized cost Estimated fair value	2013 2012 30 $ 57 $ 114 271
Gross unrealized gains Gross unrealized losses	84 214 (0) (0)
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	(130) (7) 130 132 106 88 – –
0 = less than $0.5 million

Approved equity investment facility that has not been disbursed was $587 million at 31 December 2013 ($652 million – 2012).

Fair Value Disclosure

ADB’s equity investments reported at fair value as of 31 December 2013 were $120 million ($271 million – 2012). Equity investments with readily determinable market prices are valued using quoted prices in active markets and are classified as Level 1. Equity investments valued with financial models using unobservable inputs are classified as Level 3.

The office of risk management is primarily responsible for determining the fair value of equity investments with associated derivatives using discounted cash flow models. Inputs for the models are based on significant unobservable inputs such as discount rates and asset growth rates applicable to individual equity investment contracts that are internally determined and are classified as Level 3. An increase in discount rates results in a decrease in the fair value of the equity investments.

The fair value hierarchy of ADB’s equity investments at fair value as of 31 December 2013 and 2012 was as follows:

($million)
Level 1 Level 2 Level 3 Total equity investments at fair value	2013 2012 114 $ 271 $ – – 6 – 120 $ 271 $

The valuation technique and quantitative information regarding significant unobservable inputs for equity investment assets (banking and other financial institutions) classified as Level 3 as of 31 December 2013 are presented below. There were no significant unobservable inputs used as of 31 December 2012.

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31 December 2013 Equity investment	Valuation Technique Discounted cash flows	Unobservable Range Inputs (Weighted Average) Discount rate 18.00% to 22.00% (20.00%) Asset growth rate 19.00% to 62.00% (27.00%)

The following table presents the changes in the carrying amounts of ADB’s Level 3 equity investments for the years ended 31 December 2013 and 2012:

($million)
Balance, 1 January Equity investment Total gains (losses) - (realized/unrealized) Included in earningsa Balance, 31 December	Equity Investments under Fair Value Method
	31 December 2013 31 December 2012 – $ – $ 3 – 3 – 6 $ – $

Note: There were no realized/unrealized gains and losses included in other comprehensive income. a Included in net unrealized gains (losses) (OCR-2).

NOTE I—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.

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.

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 agreements usually match the terms of particular investments.

Included in RECEIVABLE FROM/PAYABLE FOR SWAPS – Borrowings are interest rate and currency swaps that ADB has entered into for the purpose of hedging specific borrowings. The terms of ADB’s interest rate swap and currency swap agreements usually match the terms of particular borrowings. Included in RECEIVABLE FROM/PAYABLE FOR SWAPS – Investments are interest rate, currency and foreign exchange swaps that ADB has entered into for the purpose of hedging specific investments. Included in RECEIVABLE FROM/PAYABLE FOR SWAPS – Loans are interest rate and currency swaps that ADB has entered into for the purpose of hedging specific loans. The loan related swaps were executed to better align the composition of certain outstanding loans with funding sources.

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Fair Value Disclosure

The fair value hierarchy of ADB’s derivatives and the balance sheet location as of 31 December 2013 and 2012 were as follows:

($ million)
Balance Sheet Location Assets Borrowings related swaps Receivable from Swaps - Borrowings Currency swaps Interest rate swaps FX Swaps Investments related swaps Receivable from Swaps - Investments Currency swaps Interest rate swaps FX swaps Loans related swaps Receivable from Swaps - Loans Currency swaps Interest rate swaps Total assets at fair value Liabilities Borrowings related swaps Payable for Swaps - Borrowings Currency swaps Interest rate swaps FX Swaps Investments related swaps Payable for Swaps - Investments Currency swaps Interest rate swaps FX swaps Loans related swaps Payable for Swaps - Loans Currency swaps Interest rate swaps Total liabilities at fair value		Fair Value Me	asurements
	31 December 2013 26,361 $ 961 – 4,997 4 2,094 623 3 35,043 $ 27,121 $ 220 – 4,401 51 1,976 544 34 34,347 $	Level 1 – $ – – – – – – – – $ – – – – – – – $	Level 2 Level 3 20,303 $ 6,058 $ 923 38 – – 4,997 – 4 – 2,094 – 623 – 1 2 28,945 $ 6,098 $ 27,121 $ – $ 168 52 – – 4,401 – 51 – 1,976 – 26 518 31 3 33,774 $ 573 $

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($million)
Balance Sheet Location Assets Borrowings related swaps Receivable from Swaps - Borrowings Currency swaps Interest rate swaps FX Swaps Investments related swaps Receivable from Swaps - Investments Currency swaps Interest rate swaps FX Swaps Loans related swaps Receivable from Swaps - Loans Currency swaps Interest rate swaps Total assets at fair value Liabilities Borrowings related swaps Payable for Swaps - Borrowings Currency swaps Interest rate swaps FX Swaps Investments related swaps Payable for Swaps - Investments Currency swaps Interest rate swaps FX Swaps Loans related swaps Payable for Swaps - Loans Currency swaps Interest rate swaps Total liabilities at fair value		Fair Value Me	asurements
	31 December 2012 27,700 $ 1,614 105 4,808 10 3,692 597 4 38,530 $ 24,972 $ 98 104 4,762 73 3,447 576 60 34,092 $	Level 1 – $ – – – – – – – – $ – $ – – – – – – – – $	Level 2 Level 3 21,064 $ 6,636 $ 1,570 44 105 – 4,808 – 10 – 3,692 – 597 – 2 2 31,848 $ 6,682 $ 24,972 $ – $ 52 46 104 – 4,762 – 73 – 3,447 – 26 550 53 7 33,489 $ 603 $

The office of risk management is primarily responsible for determining the fair value of derivatives using discounted cash flow models. Market inputs, such as yield curves, foreign exchange rates, basis spreads, cross currency rates, and volatilities are obtained from pricing services and brokers and applied to the models. ADB has a process to validate the appropriateness of the models and inputs in determining the hierarchy levels. This involves evaluating the nature of rates and spreads to determine if they are indicative and binding. For derivatives classified under Level 3, 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 2013 and 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 2013 and 2012 are presented below:

31 December 2013 Currency swaps, Interest rate swaps 31 December 2012 Currency swaps, Interest rate swaps	Valuation Technique Discounted cash flows Valuation Technique Discounted cash flows	Unobservable Range Inputs (Weighted Average) Basis swap spread -0.98% to 8.80% (0.19%) 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 swaps receivable and swaps payable for the years ended 31 December 2013 and 2012:

($million)
	Borrowings re	lated swaps	Loans related swaps
Balance, 1 January 2013 Total gains (losses) - (realized/unrealized) Included in earningsa	Swaps receivable 6,680 $ (543)	Swaps payable (46) $ 0	Swaps receivable Swaps payable 2 $ (557) $ 1 22
Included in other comprehensive incomeb Issuances Maturities/Redemptions Balance, 31 December 2013 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 gains (losses) (OCR-2). bIncluded in currency translation adjustments (Note M). cIncludes accretion of $41 million.	(564) 1,614 (1,091) 6,096 $ (386) $	(0) (6) – (52) $ 0 $	(2) 44 1 (123) c – 93 2 $ (521) $ 1 $ 20 $
0 = less than $0.5 million

($million)
	Borrowings re	lated swaps	Loans related swaps
Balance, 1 January 2012 Total gains (losses) - (realized/unrealized) Included in earningsa Included in other comprehensive incomeb	Swaps receivable 5,950 $ 100 179	Swaps payable (83) $ 22 0	Swaps receivable Swaps payable 23 $ (610) $ (5) 21 (1) (2)
Issuances Maturities/Redemptions Balance, 31 December 2012 The amount of total gains (losses) for the period included in earnings attributable to the change in net unrealized gains or lossesarelating to	2,447 (1,996) 6,680 $	– 15 (46) $	– (4) c (15) 38 2 $ (557) $
assets/liabilities still held at the reporting date	16 $	22 $	(5) $ 21 $

a Included in net unrealized gains (losses) (OCR-2). b Included in currency translation adjustments (Note M). c Accretion. 0 = less than $0.5 million

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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:

($ million)

Borrowings related swaps Currency swaps Interest rate swaps FX swaps Investments related swaps Currency swaps Interest rate swaps FX swaps Loans related swaps Currency swaps Interest rate swaps 0 = less than $0.5 million	Location of Gain (Loss) recognized in Income(Expenses) on Derivatives Net Unrealized Gains (Losses) Borrowing and related expenses Net Unrealized Gains (Losses) Borrowing and related expenses Net Unrealized Gains (Losses) Borrowing and related expenses Net Unrealized Gains (Losses) Revenue from Investments Net Unrealized Gains (Losses) Revenue from Investments Net Unrealized Gains (Losses) Revenue from Investments Net Unrealized Gains (Losses) Revenue from Loans Net Unrealized Gains (Losses) Revenue from Loans	Amount of Gain (Loss) recognized in Income(Expenses) on Derivatives
		2013 2012 (437) $ 377 $ 989 1,027 (824) (98) 612 581 (0) 0 0 2 340 $ 1,889 $ (0) $ 33 $ (4) (4) 16 (2) (5) (4) (0) (4) 9 24 16 $ 43 $ 20 $ 16 $ (23) (20) 22 6 (22) (16) (3) $ (14) $

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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 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.

Counterparty credit risk is also mitigated by requiring counterparties to post collateral based on specified credit rating driven thresholds. As of 31 December 2013, ADB had received collateral of $1,651 million ($4,153 million – 2012) in connection with the swap agreements. Of this amount, $633 million ($2,155 million – 2012) was recorded as swap related collateral in the balance sheet.

ADB has entered into several agreements with its derivative counterparties under the ISDA Master Agreement 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 absent of local market constraints) and an amount equal to its gross liability position with each counterparty (in the case of counterparties without enforceable netting agreement). The aggregate fair value of all derivative instruments that ADB has under enforceable ISDA Master Agreement that are in a net liability (negative marked-to-market) position as of 31 December 2013 was $981 million ($340 million – 2012). The gross liability position in the aggregate fair value of all derivative instruments that ADB has without enforceable netting agreement amounted to $702 million as of 31 December 2013 ($595 million – 2012).

ADB has elected not to offset any derivative instruments by counterparty in the balance sheet. Gross amounts of RECEIVABLE FROM SWAPS and PAYABLE FOR SWAPS not offset in the balance sheet that are subject to enforceable master netting arrangements as of 31 December 2013 and 2012 were as follows: (See Note E for PAYABLE UNDER SECURITIES REPURCHASE ARRANGEMENTS.)

($million)
		As of 31 December 2013	(c)=(a)-(b) Net amount	As of 31 December 2012
	(a)	(b)		(a) (c)=(a)-(b) (b)
	Gross amount of assets presented in the balance sheeta	Gross amounts not offset in the balance sheet		Financial instruments Collateral receivedb Gross amount of assets presented in the balance sheeta Gross amounts not offset in the balance sheet Net amount
		Financial instruments Collateral receivedb
Receivable from swaps Total	34,328 $	32,664 $ 1,461 $	203 $ 203 $	37,884 $ 33,157 $ 4,030 $ 697 $
	34,328 $	32,664 $ 1,461 $		37,884 $ 33,157 $ 4,030 $ 697 $

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	($million)
	Payable for swaps Total		(c)=(a)-(b) Financial instruments Collateral pledged 32,664 $ – $ 981 $ 32,664 $ – $ 981 $ As of 31 December 2013 (b) Gross amounts not offset in the balance sheet Net amount	As of 31 December 2012
		(a)		(a) (c)=(a)-(b) (b)
		Gross amount of liabilities presented in the balance sheetc		Financial instruments Collateral pledged Gross amount of liabilities presented in the balance sheetc Gross amounts not offset in the balance sheet Net amount
		33,645 $		33,497 $ 33,157 $ – $ 340 $
		33,645 $		33,497 $ 33,157 $ – $ 340 $

a This excludes gross amount of RECEIVABLE FROM SWAPS presented in the balance sheet not subject to enforceable master netting agreements amounting to $715 million ($646 million - 31 December 2012).

b Collateral received includes both cash and securities collateral.

c This excludes gross amount of PAYABLE FOR SWAPS presented in the balance sheet not subject to enforceable master netting agreements amounting to $702 million ($595 million - 31 December 2012).

Change in Accounting Principle

In June 2013, ADB changed its accounting principles for presenting selected derivative instruments in the balance sheet. ADB transacts in interest rate swaps (IRS), currency swaps, and FX swaps, which meet the definition of derivatives. All swaps are fair valued and presented the balance sheet as either assets or liabilities. ADB has been grossing up the swap contracts in the balance sheet with the pay-leg recorded as a liability (payable for swaps) and receive-leg recorded as an asset (receivable from swaps) and has not elected to offset any swap transactions. ADB reassessed its accounting principle related to the presentation of derivatives and determined that effective 30 June 2013, ADB would present derivative instruments in the balance sheet as either assets or liabilities, consistent with the legal rights and way the instruments are settled. This has impacted interest rate swaps under the Master Agreement of the International Swaps and Derivatives Association (ISDA), for which ADB has the right of set off and been net settling the payments for each contract. Other derivatives were not impacted by the change. Management is of the view that this better aligns the accounting principle for the presentation of swaps in the balance sheet with the industry practice and reflects the business intentions and practices and legal rights. ADB believes that the change is a preferable accounting principle, although the past accounting principle was acceptable. The change has been applied retrospectively which impacted the receivable from swaps and payable for swaps in the balance sheet and has no impact on the net income, comprehensive income, or any other components of the equity.

The effect of the change on the applicable line items in the balance sheet previously reported is summarized in the table below.

($million)
Balance Sheet Assets Receivable from swaps Borrowings Investments Loans Liabilities Payable for swaps Borrowings Investments Loans	31 December 2012
	As Reported As Adjusted
	32,419 $ 29,419 $ 8,541 8,510 631 601 $41,591 $38,530 28,173 $ 25,174 $ 8,314 8,282 666 636 37,153 $ 34,092 $

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NOTE J—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 depreciation for the year ended 31 December 2013 amounted to $4 million ($4 million – 2012), net of amortization for the headquarters building. At 31 December 2013, the unamortized deferred compensation balance (included in ACCOUNTS PAYABLE AND OTHER LIABILITIES – Miscellaneous) was $7 million ($7 million –2012). At 31 December 2013 accumulated depreciation for property, furniture, and equipment was $241 million ($222 million – 2012).

The changes in the property, furniture, and equipment during 2013 and 2012, as well as information pertaining to accumulated depreciation, were as follows:

($ million)

($million)
					Property, Furniture and Equipment
					Buildings	Office Furniture
					and	and		Work in
		Land			Improvements	Equipment		Progress				Total
Cost:
Balance, 1 January 2013	$		10	$	212	$	149	$	11		$		382
Additions during the year			–		6		16		13				35
Disposals during the year			–		–		(2)		(7)				(9)
Balance, 31 December 2013			10		218		163		17				408
Accumulated Depreciation:
Balance, 1 January 2013			–		(108)		(114)		–				(222)
Depreciation during the year			–		(6)		(15)						(21)
Disposals during the year			–				2						2
Balance, 31 December 2013			–		(114)		(127)		–				(241)
Net Book Value, 31 December 2013	$		10	$	104	$	36	$	17		$		167

Net Book Value, 31 December 2013	$		10	$	104	$	36	$	17		$		167
($million)
					Property, Furniture and Equipment
					Buildings	Office Furniture
					and	and		Work in
		Land			Improvements	Equipment		Progress				Total
Cost:
Balance, 1 January 2012	$		10	$	209	$	131	$	12		$		362
Additions during the year			–		3		21		(1)				23
Disposals during the year			–		–		(3)						(3)
Balance, 31 December 2012			10		212		149		11				382
Accumulated Depreciation:
Balance, 1 January 2012			–		(102)		(100)		–				(202)
Depreciation during the year			–		(6)		(17)		–				(23)
Disposals during the year			–				3		–				3
Balance, 31 December 2012			–		(108)		(114)		–				(222)
Net Book Value, 31 December 2012	$		10	$	104	$	35	$	11		$		160

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NOTE K—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 determining the fair value of borrowings 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, and equity indices.

The fair value hierarchy of ADB’s borrowings carried at fair value as of 31 December 2013 and 2012 was as follows:

($million)
Level 1 Level 2 Level 3 Total borrowings at fair value	2013 2012 – $ – $ 50,698 51,706 6,674 7,293 57,372 $ 58,999 $

As of 31 December 2013, the fair value of ADB’s borrowings reported at amortized cost was $4,888 million ($6,841 million – 2012).

The fair value of borrowings reported at amortized cost as of 31 December 2013 was all classified as Level 2 within the fair value hierarchy.

During the years ended 31 December 2013 and 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 2013 and 2012:

($million)	2013 2012 7,293 $ 6,428 $ (576) 203 (562) 183 1,610 2,258 (1,091) (1,779) 6,674 $ 7,293 $ (413) $ 50 $
Balance, 1 January Total gains (losses) - (realized/unrealized) Included in earningsa Included in other comprehensive incomeb Issuances Maturities/Redemptions Balance, 31 December 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 gains (losses) (OCR-2).
bIncluded in currencytranslation adjustments(Note M).

The valuation techniques and quantitative information on significant unobservable inputs used in valuing ADB’s borrowings classified as Level 3 as of 31 December 2013 and 2012 are presented below:

31 December 2013 Borrowings 31 December 2012 Borrowings	Valuation Technique Discounted cash flows Valuation Technique Discounted cash flows	Unobservable Range Inputs (Weighted Average) Derived credit spread -3.70% to 0.97% (-0.54%) 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 decreases (increases) the fair value of the borrowings.

Refer to OCR-7 for Summary Statement of Borrowings.

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

Capital Stock

The authorized capital stock of ADB as of 31 December 2013 consists of 10,638,933 shares (10,638,933 – 2012), of which 10,572,003 shares (10,614,017 – 2012) have been subscribed by members. Of the subscribed shares, 10,041,552 (10,081,885 – 2012) are “callable” and 530,451 (532,132 – 2012) are “paid-in”. The “callable” share capital is subject to call by ADB only as and when required to meet ADB’s 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

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not required by ADB for the conduct of its operations. Nonnegotiable, noninterest-bearing demand obligations received on demand amounted to $377 million ($336 million – 2012), while those notes received with fixed encashment schedules totaled $581 million ($455 million – 2012).

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).

As of 31 December 2013, all matured installments amounting to $6,931 million ($6,096 million – 2012) had been received. Installments not due aggregating $1,238 million ($2,082 million – 2012) were as follows:

For the Year ending 31 December:

($ million)

2014 2015	848 $ 390
	1,238 $

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 million as of 31 December 2013 ($73 million – 2012) expressed in terms of the SDR on the basis of $1.54000 ($1.53692 – 2012) per SDR ($57 million 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 2013 consisted of (i) the net increase of $1,407 million ($1,220 million – 2012) 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 US dollar during the period from 1 April 1978 to 31 December 2013 and (ii) the net decrease of $17 million ($332 million – 2012) in the value of such currency holdings in relation to the US dollar during the same period. In terms of receivable from and payable to members, they are as follows:

($ million)

Notional MOV Receivables Notional MOV Payables Total	2013 2012 1,461 $ 1,240 $ 71 352 1,390 $ 888 $

Membership

As of 31 December 2013 and 2012, ADB’s shareholders consist of 67 member countries, 48 countries from the region and 19 countries from outside the region (OCR-8) .

NOTE M—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 2013, the Board of Governors approved the allocation of 2012 net income of $124 million, after appropriation of guarantee fees to special reserve, as follows: (i) $322 million representing the ASC 815/825 adjustments and the unrealized portion of net income from equity investments accounted for under the equity method, be added from the Cumulative Revaluation Adjustments account; (ii) $67 million be transferred to the Loan Loss Reserve; (iii) $211 million to the Ordinary Reserve; (iv) $120 million to the Asian Development Fund (ADF); (v) $30 million to the Technical Assistance Special Fund (TASF); (vi) $9 million to the Climate Change Fund (CCF); (vii) $6 million to the Regional Cooperation and Integration Fund (RCIF); and $3 million to the Financial Sector Development Partnership Special Fund (FSDPSF). The Board of Governors also approved in May 2013 the transfer of $67 million from Surplus to Ordinary Reserve.

In May 2012, the Board of Governors approved the allocation of 2011 net income of $594 million, after appropriation of guarantee fees to special reserve, as follows: (i) $6 million be added from the Loan Loss Reserve; (ii) $23 million representing the ASC 815/825 adjustments and the unrealized portion of net income from equity investments accounted for under the equity method, to the Cumulative Revaluation Adjustments account; (iii) $417 million to the Ordinary Reserve; (iv) $120 million to ADF; and (v) $40 million 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 charge of $1 million to the Ordinary Reserve during the year ended 31 December 2013 (net credit of $5 million – 2012). That charge is the increase 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 US dollar not allocated to members as notional maintenance of value adjustments in accordance with resolutions of the Board of Directors.

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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 from equity investments accounted under equity method is also transferred to this account. During 2013, the 2012 net unrealized losses on derivatives of $331 million (net unrealized gains of $6 million – 2012) and net gains from equity investments accounted for under the equity method of $9 million ($17 million – 2012) resulted in a debit balance in the Cumulative Revaluation Adjustments account at 31 December 2013 of $38 million (credit balance of $284 million – 2012).

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 2013, guarantee fees amounting to $18 million ($18 million – 2012) 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 2013, the loan loss reserve requirement was $261 million ($194 million – 2012).

Surplus

Surplus represents funds for future use to be determined by the Board of Governors. In 2013, the Board approved the transfer of $67 million from Surplus to the Ordinary Reserve.

Accumulated Other Comprehensive Income (Loss)

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

The changes in Accumulated Other Comprehensive Loss balances for the years ended 31 December 2013 and 2012 were as follows:

($million)
Balance, 1 January Other comprehensive (loss) income before reclassifications Amounts reclassified from accumulated other comprehensive loss Net current-period other comprehensive (loss) income Balance, 31 December	Adjus Accum Trans	tments ulated lation	Invest	ments Investments Unrealized Holding Gains Equity			2013 2012 (1,513) $ (1,183) $ 630 (393) Adjustments Pension/Postretirement Liability		Loss Accumulated Other Comprehensive
	2013	2012	2013	2012	2013	2012	2013		2013	2012
	106 $	144 $	395 $	390 $	214 $	228 $	(1,513) $		(798) $	(421) $
		(38)		31	(34)	74	630		173	(326)
	(162)		(261)
	–	–	(11)	(26)	(106)	(88)	101	63	(16)	(51)
	(162) $	(38)	(272) $	5 $	(140) $	(14) $	731 $	(330) $	157 $	(377) $
	(56) $	106 $	123 $	395 $	74 $	214 $	(782) $	(1,513) $	(641) $	(798) $

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NOTE N—INCOME AND EXPENSES

Total income from loans for the year ended 31 December 2013 was $646 million ($770 million – 2012). The average yield on the loan portfolio during the year was 1.31% (1.56% – 2012), including premium received on prepayment and other loan income.

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 2013 was $367 million ($434 million – 2012). 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 1.43% (1.69% – 2012) excluding unrealized gains and losses on investments and 0.37% (1.70% – 2012) including unrealized gains and losses on investments.

Total income from equity investment operations, including net realized gains, resulted in a net income of $186 million ($118 million – 2012) for the year ended 31 December 2013. This included a total of $6 million (net gain of $34 million – 2012) share in the net loss of investee companies accounted for under the equity method, dividend income of $7 million ($5 million – 2012), gains from divestments of $178 million ($90 million – 2012) and $9 million (nil – 2012) miscellaneous fees. These were offset by $2 million ($10 million – 2012) other than temporary impairment losses.

Income from other sources primarily included income received as executing agency amounting to $11 million ($10 million – 2012), and other miscellaneous income amounting to $8 million ($8 million – 2012).

Total borrowing expense of $394 million ($504 million – 2012) consisted of interest expense and other related expenses such as amortization of issuance costs, while the average cost of borrowings outstanding after swaps was 0.51% (0.91% – 2012).

Total depreciation expense incurred for the year ended 31 December 2013 amounted to $21 million ($23 million – 2012).

ADB leases office spaces and other assets. Rental expenses under operating leases for the years ended 31 December 2013 and 2012 were $11 million and $10 million, 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 2013 are as follows:

($ million)

($million)
	Minimum
Year ending 31 December	future rentals
2014	4
2015	3
2016	2
2017	1
Later years	1

Administrative expenses (other than those pertaining directly to ordinary operations and special operations) for the year ended 31 December 2013 were apportioned between OCR and ADF in proportion to the relative volume of operational activities. Of the total administrative expenses of $730 million ($655 million – 2012), $305 million ($283 million – 2012) 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 $14 million ($21 million – 2012) related to new loans made effective for the year ended 31 December 2013 (Note B) .

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For the year ended 31 December 2013, net write back of $6 million (net loss provision of $7 million – 2012) consisted of $4 million additional loan loss provision ($12 million – 2012) and $10 million ($5 million – 2012) write backs.

The following table provides information on the unrealized gains or losses included in income for the years ended 31 December 2013 and 2012:

($ million)

($million)
		2013				2012
Unrealized gains (losses) on:
Borrowings and related swaps	$		83		$		(381)
Investments related swaps			16				27
Loans related swaps			42				22
Equity investments			3				–
Translation adjustments of
non-functional currencies			6				1
Total	$		150		$		(331)

NOTE O—RELATED PARTY TRANSACTIONS

At 31 December 2013 and 2012, ADB had the following net receivables from 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:

($ million)

Amounts receivable from: Asian Development Fund Special Funds Agency Trust Funds—net Staff Retirement Plan Total 0 = less than $0.5 million	2013 2012 35 $ 38 $ 1 0 0 2 – 2 36 $ 42 $

As of 31 December 2013 and 2012, the related parties include other special funds consisting of TASF, Japan Special Fund, ADB Institute, Pakistan Earthquake Fund, RCIF, CCF, Asian Pacific Disaster Response Fund, FSDPSF, and ASEAN Infrastructure Fund.

NOTE P—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 the highest average two years remuneration during eligible service. The Plan assets are segregated in a separate fund. The costs of administering the Plan are absorbed by ADB, except for fees

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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 $48 million to the Plan for 2014 based on budgeted contribution of 21%.

ADB’s staff members are expected to contribute $58 million representing participants’ mandatory contribution of $11 million and discretionary contributions of $47 million.

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 2013 the net return on the Plan assets was 16.7% (13.6% – 2012). ADB expects the long-term rate of return on the assets to be 7.5% (7.5% – 2012).

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 2013 and 2012. These include rates of withdrawal, incapacity retirement rates, mortality rates, percent of international staff who commute, currency reserve, and pattern of discretionary benefits withdrawal.

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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.

The following table sets forth the pension and postretirement medical benefits at 31 December 2013 and 2012:

($million)
Change in projected benefit obligation:	Pension	Benefits	Postretirement Medical Benefits
	2013	2012	2013	2012
Projected benefit obligation at beginning of year Service cost Interest cost Plan participants' contributions Actuarial loss (gain) Benefits paid Projected benefit obligation at	3,096 $ 89 136 70 (345) (111)	2,527 $ 68 130 65 400 (94)	421 $ 25 19 – (126) (5)	323 $ 18 17 – 66 (3)
end of year	2,935 $	3,096 $	334 $	421 $
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	1,641 $ 280 141 70 (111)	1,378 $ 189 103 65 (94)	– $ – 5 – (5) – $	– $ – 3 – (3)
	2,021 $	1,641 $		– $
Funded status	(914) $	(1,455) $	(334) $	(421) $
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	– (914)	– (1,455)	(6) (328) (334) $ 20 $ – 20 $	(7) (414)
	(914) $ 762 $ –	(1,455) $ 1,359 $ –		(421) $
				154 $ –
	762 $	1,359 $		154 $
Discount rate	5.00%	4.30%	5.00%	4.30%
Expected return on plan assets Rate of compensation increase varies with age and averages	7.50% 4.00%	7.50% 4.00%	N/A N/A	N/A 4.00%

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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 2013 and 2012. The rate was assumed to decrease gradually to 5.0% through 2021 (5.0% through 2020 – 2012) and remain at the level thereafter.

The following table summarizes the benefit costs associated with pension and postretirement medical benefits for the year ended 31 December 2013 and 2012:

($million)
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
	2013	2012	2013	2012
	89 $ 136 (120) – 92	68 $ 129 (115) – 58	26 $ 19 – – 8	18 $ 17 – – 5
	197 $	140 $	53 $	40 $

The accumulated benefit obligation of the pension plan as of 31 December 2013 was $2,754 million ($2,883 million – 2012).

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 $57 million. There was no 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.

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

($million)
1-Percentage- Point Increase Effect on total service and interest cost components 11 $ Effect on postretirement benefit obligation 72		1-Percentage- Point Decrease (11) $ (56)

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 2013:

($million)
2014 2015 2016 2017 2018 2019–2023	Pension Postretirement Benefits Medical Benefits 114 $ 7 $ 118 7 128 8 134 9 142 10 875 67

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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 2013 and 2012 were reported based on the following:

($ million)

31 December 2013 Cash and cash equivalents 31 $ Common/preferred stocks 479 Investment funds 986 Government or government- guaranteed securities 253 Corporate debt securities 206 Mortgage/Asset-backed securities: Mortgage-backed securities 35 Collateralized mortgage obligations 10 Asset-backed securities 1 Short term investments 32 Derivatives 0 Other asset/liabilitiesa—net (12) Total fair value of plan assets 2,021 $	31 December 2013	Fair Value Measurements	Fair Value Measurements
		Level 1	Level 2 Level 3 31 $ – $ – 0 – – 0 2 3 1 23 0 5 5 1 0 23 – 0 – (12) – 74 $ 8 $
		– $ 479 986 251 202 12 – – 9 0 –
	2,021 $	1,939 $

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

0 = less than $0.5 million

($ million)

31 December 2012 Cash and cash equivalents 55 $ Common/preferred stocks 384 Investment funds 676 Government or government- guaranteed securities 200 Corporate debt securities 198 Mortgage/Asset-backed securities: Mortgage-backed securities 59 Collateralized mortgage obligations 4 Asset-backed securities 1 Short term investments 88 Derivatives (1) Other asset/liabilitiesa—net (23) Total fair value of plan assets 1,641 $	31 December 2012	Fair Value Measurements	Fair Value Measurements
		Level 1	Level 2 Level 3 55 $ – $ – 0 – – 7 – 9 10 27 0 2 2 1 – 67 – (1) 0 (23) – 144 $ 12 $
		– $ 384 676 193 179 32 0 – 21 0 –
	1,641 $	1,485 $

a Incudes receivables and liabilities carried at amounts that approximate fair value. 0 = less than $0.5 million

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The Plan’s investment committee and SRP investment unit meet periodically and are involved in overseeing the activities and performance of the investment portfolios. The fair value of the Plan investments is provided by the Plan’s global custodian from various independent pricing providers. The accounting division in coordination with data management unit of treasury services division evaluates the fair value in determining the hierarchy level. All investments including equity securities, fixed income securities and derivatives are provided by independent pricing providers. Equity securities include common and preferred stocks and mutual funds. Fixed income securities include government or government-guaranteed securities, corporate obligations, asset and mortgage-backed securities, and short-term investments. Derivatives include futures, swaps and currency forward contracts.

The table below provides details of transfers between Levels 1 and 2 for the years ended 31 December 2013 and 2012:

($ million)

Investments	Level 1 Level 2 4 $ (4) $ 4 (4) (1) 1 7 $ (7) $ 2013	2012	2012
	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 (out of) into	4 $ 4 (1)	(4) $ 14 (16)	4 $ (14) 16
	7 $	(6) $	6 $

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 2013 and 2012:

($ million)

Balance, 31 December 2012 Total realized/unrealized (losses)/gains in:	Investments
	Common / preferred stocks Government or gov't.-guaranteed securities Corporate debt securities Mortgage / Asset- backed securities Derivatives
	0 $ – $ 10 $ 2 $ 0 $
Net decrease in net assets available
for benefits Purchases Sales/Maturities Settlement and others Transfers into Level 3 Balance, 31 December 2013 Total unrealized gains (losses) included in income related to financial assets liabilities still held at the reporting date	(0) (0) (0) (0) (0) – 2 1 6 – (0) – (9) (1) – – – (0) (1) – – – – 0 –
	0 $ 2 $ 1 $ 5 $ – $
	0 $ (0) $ (0) $ (0) $ – $
0 = less than $0.5 million

99

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continued

($ million)

($million)
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
	0 $ 5 $ 6 $ 7 $ 0 $
Net increase (decrease) in net assets
available for benefits Purchases Sales/Maturities Settlement and others Transfers (out of) into Level 3 Balance, 31 December 2012 Total unrealized gains included in income related to financial assets liabilities still held at the reporting date	0 0 0 0 (0) – – 2 – – – (4) (0) (0) – – – (0) (2) – – (1) 2 (3) –
	0 $ – 10 $ 2 $ 0 $
	0 $ – $ 0 $ 0 $ 0 $

0 = less than $0.5 million

Transfers into and out of Level 3 in 2013 and 2012 are due to the availability of market observable inputs.

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NOTE Q—OTHER FAIR VALUE DISCLOSURES

The carrying amounts and estimated fair values of ADB’s financial instruments as of 31 December 2013 and 2012 are summarized below:

($million)
On-balance sheet financial instruments: ASSETS: Due from banks Investments (Note D) Securities transferred under repurchase agreements (Note E) Securities purchased under resale arrangements Loans outstanding (Note F) Equity investments carried at fair value (Note H) Receivable from swaps - borrowings (Note I) Receivable from swaps - investments (Note I) Receivable from swaps - loans (Note I) Swap related collateral (Note I) Future guarantee receivable (Note G) LIABILITIES: Borrowings (Note K) Payable for swaps - borrowings (Note I) Payable for swaps - investments (Note I) Payable for swaps - loans (Note I) Payable under securities repurchase agreements (Note E) Swap related collateral (Note I) Guarantee liability (Note G)	2013		2012
	Carrying Amount	Estimated Fair Value	Carrying Estimated Amount Fair Value 263 $ 263 $ 23,778 23,778 348 348 334 334 52,837 54,082 271 271 29,419 29,419 8,510 8,510 601 601 2,155 2,155 22 22 64,780 65,840 25,174 25,174 8,282 8,282 636 636 350 350 2,155 2,155 22 22
	316 $ 24,452 592 306 53,088 120 27,322 7,095 626 633 32 61,630 27,341 6,428 578 602 633 32	316 $ 24,452 592 306 53,870 120 27,322 7,095 626 633 32 62,260 27,341 6,428 578 602 633 32

As of 31 December 2013 and 2012, ADB has no material assets or liabilities measured at fair value on a non-recurring basis.

NOTE R—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 separately 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.

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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 2013 and 2012 is as follows:

($million)
Special Funds	2013	No.	2012
	Total Net Assets		Total Net Assets	No.
Asian Development Fund	33,359 $	1	33,346 $	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 Financial Sector Development Partnership Special Fund Subtotal	330 100 9 18 5 14 5 7	1 1 1 1 1 1 1 1 9	141 98 10 4 2 8 10 –	1 1 1 1 1 1 1 –
	33,847		33,619	8
Trust Funds (including project specific cofinancing)	2,179	100	1,752	92
Total	36,026 $	109	35,371 $	100

During the year ended 31 December 2013, a total of $9 million ($10 million – 2012) was recorded as compensation for administering projects/programs. The amount has been included in REVENUE From other sources—net.

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continued

NOTE S—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 the 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 2013, 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 require disclosures.

The review of ADB’s loan, equity investments, and guarantee portfolio, has identified 20 (29 – 2012) 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 2013, the assets of these nonconsolidated VIEs totaled $4,194 million ($59,671 million – 2012).

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.

($million)
Carrying value of the ADB’s Variable Interests Assets Liabilities Maximum Exposure to Loss in Nonconsolidated VIEs Loans Equity Investments Guarantees Total No. of VIEs Total Assets of the Entities	2013 2012 870 $ 1,117 $ 5 7 737 $ 937 $ 159 226 100 133 996 $ 1,296 $ 20 29 4,194 $ 59,671 $

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continued

NOTE T—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 2013 and 2012:

($ million)

Country People’s Republic of China Indonesia India Philippines Pakistan Others Total	2013	2013	2012
	Outstanding Balance	Revenue	Outstanding Balance Revenue 13,430 $ 200 $ 9,590 172 11,685 124 6,347 77 5,425 59 9,214 195 55,691 $ 827 $
	13,996 $ 8,741 12,311 4,977 5,192 10,470	215 $ 140 90 50 48 131
	55,687 $	674 $

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

For the year ended 31 December 2013, sovereign loans to three countries (three – 2012) generated in excess of 10 percent of revenue; this amounted to $172 million, $133 million, and $79 million ($189 million, $163 million, and $104 million – 2012).

NOTE U—SUBSEQUENT EVENTS

ADB has evaluated subsequent events after 31 December 2013 through 12 March 2014, the date these Financial Statements are available for issuance. During this period, ADB has raised additional borrowings of approximately $3,396 million in various currencies.

104

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 2013. 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 (1992). Based on that assessment, management believes that as of 31 December 2013, ADB's internal control over financial reporting is effective based upon the criteria established in Internal Control – Integrated Framework (1992).

Takehiko Nakao President

Thierry de Longuemar

Vice-President (Finance and Risk Management)

Simon T. Bradbury Controller

12 March 2014

105

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Deloitte & Touche LLP Unique Entity No. T08LL0721A 6 Shenton Way #32-00 OUE Downtown 2 Singapore 068809

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

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, 2013, based on the criteria established in Internal Control — Integrated Framework (1992) 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.

Deloitte & Touche LLP (Unique Entity No. T08LL0721A) is an accounting limited liability partnership registered in Singapore under the Limited Liability Partnerships Act (Chapter 163A).

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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, 2013, is fairly stated, in all material respects, based on the criteria established in Internal Control — Integrated Framework (1992) 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, 2013 and 2012, and the related special purpose statements of revenue and expenses, comprehensive income, 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 12, 2014 expressed an unqualified opinion on those special purpose financial statements.

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Public Accountants and Chartered Accountants Singapore

March 12, 2014

107

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Deloitte & Touche LLP Unique Entity No. T08LL0721A 6 Shenton Way #32-00 OUE Downtown 2 Singapore 068809

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

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, 2013 and 2012, and the related special purpose statements of revenue and expenses, comprehensive income, 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.

Deloitte & Touche LLP (Unique Entity No. T08LL0721A) is an accounting limited liability partnership registered in Singapore under the Limited Liability Partnerships Act (Chapter 163A).

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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, 2013 and 2012, 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, 2013, based on the criteria established in Internal Control — Integrated Framework (1992) issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated March 12, 2014 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.

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Public Accountants and Chartered Accountants Singapore

12 March 2014

109

ADF-1

ASIAN DEVELOPMENT BANK—ASIAN DEVELOPMENT FUND SPECIAL PURPOSE STATEMENT OF ASSETS, LIABILITIES, AND FUND BALANCES 31 December 2013 and 2012

Expressed in Millions of US dollars

ASSETS DUE FROM BANKS INVESTMENTS (Notes C and K) Government or government-guaranteed obligations Time deposits SECURITIES PURCHASED UNDER RESALE ARRANGEMENTS (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 (Note F)	3 $ 5,561 $ 1,159 6,720 246 28,680 74 28,606 42 72 114 289 2013	3 $ 5,561 $ 1,159 6,720 246 28,680 74 28,606 42 72 114 289 2013	2012	2012
	5,561 $ 1,159		4,667 $ 1,512	85 $ 6,179 340 29,087 118 231
	28,680 74		29,165 78
	42 72		48 70
TOTAL		35,978 $		36,040 $
LIABILITIES AND FUND BALANCES PAYABLE TO RELATED FUNDS (Note E) 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)	35 $ 272 2,312 2,619 33,568 $ (69) 33,499 73 1,344 34,916 (2,106) 1,049 (500) 33,359		38 $ 207 2,449 2,694 35,592 $ (54) 35,538 73 1,224 36,835 (2,329) 1,385 (2,545) 33,346	38 $ 207 2,449
TOTAL	35,978 $		36,040 $

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

110

ADF-2

ASIAN DEVELOPMENT BANK—ASIAN DEVELOPMENT FUND SPECIAL PURPOSE STATEMENT OF REVENUE AND EXPENSES For the Years Ended 31 December 2013 and 2012 Expressed in Millions of US dollars

REVENUE From loans (Note D) From investments (Note C) EXPENSES Grants (Note J) Administrative expenses (Note G) Amortization of discounts on contributions NET REALIZED GAINS FROM INVESTMENTS (Includes amount reclassified from other comprehensive income on unrealized holding gains of $0 – 2013, $1 – 2012) NET UNREALIZED (LOSSES) GAINS	402 $ 59 461 $ 448 305 16 769 0 (28) 2013	2012
		315 $ 83 398 $ 384 283 15 682 1 25
REVENUE LESS THAN EXPENSES	(336) $	(258) $

0 = less than $0.5 million.

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

111

ADF-3

ASIAN DEVELOPMENT BANK—ASIAN DEVELOPMENT FUND SPECIAL PURPOSE STATEMENT OF COMPREHENSIVE INCOME For the Years Ended 31 December 2013 and 2012 Expressed in Millions of US dollars

REVENUE LESS THAN EXPENSES (ADF-2) Other comprehensive income (Note I) Currency translation adjustments Unrealized investment holding losses	(336) $ 2,090 $ (45) 2,045 2013	2012
		(258) $ 1,280 $ (12) 1,268
COMPREHENSIVE INCOME	1,709 $	1,010 $

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

112

ADF-4

ASIAN DEVELOPMENT BANK—ASIAN DEVELOPMENT FUND SPECIAL PURPOSE STATEMENT OF CHANGES IN FUND BALANCES For the Years Ended 31 December 2013 and 2012 Expressed in Millions of US 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 2012	$	36,450	$	73	$	1,104	$	(2,402)	$	1,643	$	(3,813)	$	33,055
Comprehensive income
for the year 2012 (Note I)										(258)		1,268		1,010
Change in amounts available
for operational commitments
Contributed Resources		(923)												(923)
Unamortized Discount		11												11
Change in nonnegotiable,
noninterest-bearing
demand obligations								73						73
Transfer from ordinary
capital resources						120								120
Balance, 31 December 2012	$	35,538	$	73	$	1,224	$	(2,329)	$	1,385	$	(2,545)	$	33,346
Comprehensive income
for the year 2013 (Note I)										(336)		2,045		1,709
Change in amounts available
for operational commitments
Contributed Resources		(2,024)												(2,024)
Unamortized Discount		(15)												(15)
Change in nonnegotiable,
noninterest-bearing
demand obligations								223						223
Transfer from ordinary
capital resources						120								120
Balance, 31 December 2013	$	33,499	$	73	$	1,344	$	(2,106)	$	1,049	$	(500)	$	33,359

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

113

ADF-5

ASIAN DEVELOPMENT BANK—ASIAN DEVELOPMENT FUND SPECIAL PURPOSE STATEMENT OF CASH FLOWS For the Years Ended 31 December 2013 and 2012

Expressed in Millions of US dollars

CASH FLOWS FROM OPERATING ACTIVITIES Interest charges on loans received Interest on investments received Administrative expenses paid Grants disbursed 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 encashed 1 Cash received from Ordinary Capital Resources Net Cash Provided by Financing Activities Effect of Exchange Rate Changes on Due from Banks Net (Decrease) Increase 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	2013 375 $ 106 (308) (577) (404) 99 124,637 (125,299) 84,711 (84,664) 1,677 (1,953) (792) 1,000 120 1,120 (6) (82) 85 3 $ (336) $ 39 16 448 (22) (0) (585) 9 4 (3) (2)	2012
		286 $ 100 (286) (529)
		(429)
		24 147,082 (147,484) 100,484 (100,528) 1,111 (1,262)
		(573)
		961 120
		1,081
		3
		82 3
		85 $
		(258) $ 20 15 384 (24) (1) (557) 25 (8) (3) 3
Exchange losses (gains)—net	28	(25)
Net Cash Used in Operating Activities	(404) $	(429) $

0 = less than $0.5 million.

Supplementary disclosure on noncash financing activities:

1 Nonnegotiable, noninterest-bearing demand promissory notes amounting to $991 million ($963 million – 2012) were received from contributing members. The accompanying notes are an integral part of these special purpose financial statements (ADF-8).

114

ASIAN DEVELOPMENT BANK—ASIAN DEVELOPMENT FUND SPECIAL PURPOSE SUMMARY STATEMENT OF LOANS 31 December 2013 and 2012 Expressed in Millions of US 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 Maldives Marshall Islands Micronesia, Federated States of Mongolia Myanmar Nepal Pakistan Palau Papua New Guinea Philippines Samoa Solomon Islands Sri Lanka Tajikistan Timor-Leste Tonga Tuvalu Uzbekistan Vanuatu Viet Nam Regional TOTAL – 31 December 2013 Allowance for HIPC Debt Relief NET BALANCE – 31 December 2013 NET BALANCE – 31 December 2012	684 $ 208 47 6,202 184 1,063 29 366 1,230 6 17 607 996 114 67 51 612 613 1,545 5,695 3 390 625 127 43 2,583 332 1 35 6 270 44 3,883 2 28,680 $ (74) 28,606 $ 29,087 $	44 $ 142 4 1,265 74 356 – 241 36 – 15 127 190 3 – 9 168 – 542 362 – 244 – 5 – 473 7 8 – – 358 15 1,593 2 6,283 $ 6,283 $ 6,005 $	– $ – – 462 – 35 – 99 – – – 66 – – – – 73 60 252 467 2 55 – – 11 23 – 10 – – 200 – 346 – 2,161 $ 2,161 $ 1,809 $	728 $ 350 51 7,929 258 1,454 29 706 1,266 6 32 800 1,186 117 67 60 853 673 2,339 6,524 5 689 625 132 54 3,079 339 19 35 6 828 59 5,822 4 37,124 $ (74) 37,050 $ 36,901 $	1.96 0.94 0.14 21.36 0.70 3.92 0.08 1.90 3.41 0.02 0.09 2.15 3.19 0.32 0.18 0.16 2.30 1.81 6.30 17.57 0.01 1.86 1.68 0.36 0.15 8.29 0.91 0.05 0.09 0.02 2.23 0.16 15.68 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 US 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 US 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 $44 million ($120 million - 2012).

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MATURITY OF EFFECTIVE LOANS AS OF 31 DECEMBER 2013

Twelve Months Ending 31 December 2014 2015 2016 2017 2018	Amount 1,299 $ 1,392 1,499 1,609 1,693	Five Years Ending 31 December 2023 2028 2033 2038 2043 2048 2053 Total	Amount
			8,796 7,538 5,881 3,363 1,619 257 17
			34,963 $

SUMMARY OF CURRENCIES RECEIVABLE ON LOANS OUTSTANDING

Currency Australian dollar Canadian dollar Danish krone Euro Yen Won Ringgit New Zealand dollar	2013 58 $ 238 28 2,040 3,750 24 1 1	2012 75 $ 273 28 2,062 5,177 25 1 2	Currency Norwegian krone Pound sterling Singapore dollar Swedish krona Swiss franc Baht US dollar Special Drawing Rights5 Total	2013 104 233 0 93 115 1 1,944 20,050 28,680 $	2012
					120 238 0 96 119 1 2,088 18,860
					29,165 $

• 0 = less than $0.5 million

3 Refer to the unwithdrawn portions of effective loans as of 31 December 2013.

4 Refer to approved loans that have not become effective as of 31 December 2013, pending borrowers' compliance with effectiveness conditions specified in the loan regulations and the loan agreements.

• 5 Basket of currencies defined by the International Monetary Fund consisting of the euro, yen, pound sterling, and US dollar. 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 SPECIAL PURPOSE STATEMENT OF RESOURCES 31 December 2013

Expressed in Millions of US dollars

SPECIAL PURPOSE STATEMENT OF RESOURCES 31 December 2013 Expressed in Millions of US dollars
	Effective Amounts Committed1	Contributions Received
CONTRIBUTED RESOURCES Australia Austria Belgium Brunei Darussalam Canada China, People's Republic of Denmark Finland France Germany Hong Kong, China Indonesia Ireland Italy Japan Kazakhstan Korea, Republic of Luxembourg Malaysia Nauru The 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 FUND	2,394 $ 275 244 20 1,951 102 231 190 1,363 1,862 109 15 95 1,153 11,959 5 570 53 29 0 761 174 283 92 21 414 470 382 106 17 122 1,557 4,191 31,210	1,802 $ 311 265 16 1,858 71 284 179 1,470 2,098 86 15 75 1,021 15,423 1 392 54 21 0 896 143 236 116 16 456 358 512 87 14 113 1,247 3,863
		33,499 73 1,340 4
TOTAL	31,210 $	34,916 $

0 = less than $0.5 million.

1 At exchange rates per Resolutions.

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 2013 and 2012

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 ten replenishments, the most recent of which (ADF XI and the fifth regularized replenishment of the Technical Assistance Special Fund [TASF]) was adopted by the Board of Governors in July 2012 and became effective on 4 June 2013 for the four-year period from January 2013. 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 SDR8,065 million, of which SDR3,067 million was to come from new donor contributions. The donors agreed to allocate 3% of the total replenishment size (equivalent to about 8% of total donor contributions) to TASF. As of 31 December 2013, ADB had received instruments of contribution from 27 donors with a total amount equivalent to SDR2,778 million, including qualified contributions amounting to SDR138 million.

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

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).

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), Asia Pacific Disaster Response Fund (APDRF), and Financial Sector Development Partnership Special Fund (FSDPSF).

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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 2013, 18 out of 28 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 US dollar 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 the transactions. Assets and liabilities are translated using the applicable exchange rates at the end of each reporting period, except for Contributed Resources received in nonfunctional 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 (LOSSES) GAINS in the Special Purpose Statement of Revenue and Expenses.

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.” 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.

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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, ADF X, and ADF XI, 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 for ADF IX and 9 years for ADF X and ADF XI, 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 on contributions 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.

Fair Value of Financial Instruments

ASC 820, “Fair Value Measurement” 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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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 December 2011, the FASB issued Accounting Standards Update (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. Subsequently, FASB issued ASU 2013-01 in January 2013 to clarify the scope of ASU 2011-11. These ASUs did not impact ADF’s special purpose financial statements.

In February 2013, the FASB issued ASU 2013-02, “Comprehensive Income (Topic 220) – Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income,” to improve the reporting of reclassifications out of accumulated other comprehensive income. The amendments are effective from quarter ended 31 March 2013 for ADB. See ADF-3 and Note I for the required disclosure.

In February 2013, the FASB issued ASU 2013-04, “Liabilities (Topic 405) – Obligations Resulting from Joint and Several Liability Arrangements for Which the Total Amount of the Obligation is Fixed at the Reporting Date,” to provide guidance for the recognition, measurement, and disclosure of obligations resulting from joint and several liability arrangements for which the total amount of the obligation within the scope of this Update is fixed at the reporting date. The amendments are effective for fiscal years beginning after 15 December 2013 and the ASU is not expected to impact ADF’s special purpose financial statements.

In April 2013, the FASB issued ASU 2013-07, “Presentation of Financial Statements (Topic 205) – Liquidation Basis of Accounting”, to require an entity to prepare its financial statements using the liquidation basis of accounting when liquidation is imminent. The amendments are effective for entities that determine liquidation is imminent during annual reporting periods beginning after 15 December 2013, and interim reporting periods therein. This ASU is not expected to impact ADF’s special purpose financial statements.

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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.

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 2013 were government or government-guaranteed obligations transferred under securities lending arrangements amounting to $26 million ($59 million – 2012).

The currency composition of the investment portfolio as of 31 December 2013 and 2012 expressed in US dollars was as follows:

($million)
Currency US dollar Euro Pound sterling Yen Total	2013 2012 2,992 $ 2,599 $ 2,545 2,460 804 772 379 348 6,720 $ 6,179 $

The estimated fair value and amortized cost of the investments as of 31 December 2013 and 2012 were as follows:

($million)
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 4,434 $ 4,430 $ 2,247 2,222 39 39 6,720 $ 6,691 $ 2013	2012
	Estimated Fair Value 4,434 $ 2,247 39 6,720 $	Estimated Amortized Fair Value Cost 3,371 $ 3,358 $ 2,762 2,702 46 45 6,179 $ 6,105 $

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

($million)
2013 2012 As of 31 December: Amortized cost 5,532 $ 4,592 $ Estimated fair value 5,561 4,667 Gross unrealized gains 32 75 Gross unrealized losses (3) (0) For the years ended 31 December: Change in net unrealized gains (losses) from prior year (45) (12) Proceeds from sales 99 24 Gross gain on sales 1 1 Gross loss on sales (1) – 0 = Less than $0.5 million

The 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 0.86% (1.28% – 2012) excluding unrealized gains and losses on investment securities, and 0.20% (1.10% – 2012) including unrealized gains and losses on investments.

There were two government or government guaranteed obligations (nil – 31 December 2012) that sustained losses for over one year. Comparative details for 2013 and 2012 are as follows:

($million)
For the year 2013 Government or government-guaranteed obligations 0 = less than $0.5 million. ($million)	Oneyear	or less	Over one	year	Total
	Fair Value	Unrealized Losses	Fair Value	Unrealized Losses	Fair Unrealized Value Losses 1,519 $ 3 $
	1,416 $	3 $	103 $	0 $
For the year 2012 Government or government-guaranteed obligations 0 = less than $0.5 million.	Oneyear	or less	Over one	year	Total
	Fair Value	Unrealized Losses	Fair Value	Unrealized Losses	Fair Unrealized Value Losses 776 $ 0 $
	776 $	0 $	– $	– $

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Fair Value Disclosure

The fair value of INVESTMENTS and related financial assets as of 31 December 2013 and 2012 were as follows:

($million)
Investments Government or government- guaranteed obligations Time deposits Securities purchased under resale arrangements Total at fair value ($million)	31 December 2013 5,561 $ 1,159 246 6,966 $	Fair Value Measurements
		Level 1 4,316 $ – – 4,316 $	Level 2 Level 3 1,245 $ – $ 1,159 – 246 – 2,650 $ – $
Investments Government or government- guaranteed obligations Time deposits Securities purchased under resale arrangements Total at fair value	31 December 2012 4,667 $ 1,512 340 6,519 $	Fair Value Measurements
		Level 1 4,044 $ – – 4,044 $	Level 2 Level 3 623 $ – $ 1,512 – 340 – 2,475 $ – $

ADB maintains documented processes and internal controls to value investment securities. 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 provided by independent valuation services or 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.

The table below provides details of transfers between Level 1 and Level 2 for the years ended 31 December 2013 and 2012:

($million)
Investments	2013 Level 1 Level 2		2012
	Level 1		Level 1 Level 2
Government or government- guaranteed obligations Transfers (out of) into Transfers into(out of)	– $ –	– $ –	(131) $ 131 $ 49 (49)

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

There were no assets measured at fair value on a recurring basis using significant unobservable inputs (Level 3) as of 31 December 2013 and 2012.

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NOTE D—LOANS AND HIPC 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 rate 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 2013, the interest rate was set at 1.0% during grace period and 1.5% thereafter (1.0% and 1.5% respectively – 2012) for ADF-only countries; and (ii) 2.0% fixed for the life of the loans for blend countries. Three loans were approved under this facility in 2013 (two – 2012).

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 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 2013 are shown in ADF-6.

As of 31 December 2013 and 2012, loans to borrowers that exceeded 5% of total loans were as follows:

($million)
Bangladesh Pakistan Viet Nam Sri Lanka Nepal Others (individually less than 5% of total loans) Total Outstanding Loans Allowance for HIPC Debt Relief Net Outstanding Loans	2013 2012 6,202 $ 6,097 $ 5,695 6,397 3,883 3,775 2,583 2,621 1,545 1,553 8,772 8,722 28,680 29,165 (74) (78) 28,606 $ 29,087 $

There were no outstanding loans in non-accrual status as of 31 December 2013 ($591 million – 31 December 2012).

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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.

The credit quality of ADF loans was as follows:

($million)
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)	2013 2012 1,908 $ 1,371 $ 16,072 16,305 10,700 11,489 28,680 $ 29,165 $

Provision for HIPC Debt Relief amounting to $82 million relating to the Afghanistan debt relief under the HIPC Initiative was recognized and charged to income in 2008. Of this amount, a total of $8 million 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 2013 to $74 million.

NOTE E—RELATED PARTY TRANSACTIONS

The OCR and special funds resources are at all times used, committed, and invested entirely separate from each other.

Payable to related funds of $35 million ($38 million – 2012) 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 XI and the fifth 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 2013, ADF has transferred all allocated contributions to TASF.

NOTE F—CONTRIBUTED RESOURCES AND ADVANCED CONTRIBUTIONS

In May 2013, the Board of Governors approved the transfer of $120 million to the ADF as part of OCR’s 2012 net income allocation.

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 2013 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, 31 December 2017 for ADF X, and 31 December 2021 for ADF XI.

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As of 31 December 2013, contributions from 27 donors totaling $3,507 million were committed for ADF XI. Of these, $858 million including amortized discount of $1 million were received and recorded in Contributed Resources.

Advance contributions received from donors outstanding as of 31 December 2013 total $272 million ($207 million – 2012). Of this, contributions totaling $220 million ($162 million – 2012) were received in demand obligations, and are included in OTHER ASSETS. The remaining $52 million ($45 million – 2012) was received in cash.

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 set aside capital 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 US 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 US 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 US dollars as denominated by the IMF. As of 31 December 2013, the value of the SDR in terms of the current US dollar was $1.54 ($1.53692 – 2012). On this basis, Set-Aside Resources amounted to $73 million ($73 million – 2012). If the capital stock of ADB as of 31 December 2013 had been valued in terms of $12,063.50 per share, Set-Aside Resources would have been $57 million.

NOTE I—ACCUMULATED OTHER 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.

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The changes in Accumulated Other Comprehensive Loss balances for the years ended 31 December 2013 and 2012 were as follows:

($million)
Balance, 1 January Other comprehensive income (loss) before reclassification Amounts reclassified from accumulated other comprehensive loss Net current-period other comprehensive income (loss) Balance, 31 December 0 = less than $0.5 million.	Adjustments 2013 2012 (2,619) $ (3,899) $ 2,090 1,280 – – 2,090 1,280 (529) $ (2,619) $ Accumulated Translation	Investments 2013 2012 74 $ 86 $ (45) (11) (0) (1) (45) (12) 29 $ 74 $ Unrealized Holding Gains	Accumulated Other Comprehensive Loss
	2013	2013	2013 2012 (2,545) $ (3,813) $ 2,045 1,269 (0) (1) 2,045 1,268 (500) $ (2,545) $
	(2,619) $	74 $
	2,090 –	(45) (0)
	2,090	(45)
	(529) $	29 $

NOTE J—GRANTS AND UNDISBURSED COMMITMENTS

ADF IX introduced financing in the form of grants for the first time. During 2013, 20 grants (23 – 2012) totaling $843 million ($693 million – 2012) were approved, while $448 million ($384 million – 2012), net of $100 million ($36 million – 2012) 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 2013 and 2012, 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 2013 through 12 March 2014, the date these Special Purpose 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 ADF’s Special Purpose Financial Statements as of 31 December 2013.

128

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 2013. 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 (1992). Based on that assessment, management believes that as of 31 December 2013, ADB's internal control over financial reporting is effective based upon the criteria established in Internal Control – Integrated Framework (1992).

Takehiko Nakao President

Thierry de Longuemar

Vice-President (Finance and Risk Management)

Simon T. Bradbury Controller

12 March 2014

129

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Deloitte & Touche LLP Unique Entity No. T08LL0721A 6 Shenton Way #32-00 OUE Downtown 2 Singapore 068809

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

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, 2013, based on the criteria established in Internal Control — Integrated Framework (1992) 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.

Deloitte & Touche LLP (Unique Entity No. T08LL0721A) is an accounting limited liability partnership registered in Singapore under the Limited Liability Partnerships Act (Chapter 163A).

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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, 2013, is fairly stated, in all material respects, based on the criteria established in Internal Control — Integrated Framework (1992) 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, 2013 and 2012 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 12, 2014 expressed an unqualified opinion on those financial statements.

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Public Accountants and Chartered Accountants Singapore

March 12, 2014

131

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Deloitte & Touche LLP Unique Entity No. T08LL0721A 6 Shenton Way #32-00 OUE Downtown 2 Singapore 068809

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

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, 2013 and 2012, 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.

Deloitte & Touche LLP (Unique Entity No. T08LL0721A) is an accounting limited liability partnership registered in Singapore under the Limited Liability Partnerships Act (Chapter 163A).

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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, 2013 and 2012, 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, 2013, based on the criteria established in Internal Control — Integrated Framework (1992) issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated March 12, 2014 expressed an unqualified opinion on management’s assertion that ADB maintained effective internal control over financial reporting.

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Public Accountants and Chartered Accountants Singapore

March 12, 2014

133

TASF-1

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

31 December 2013 and 2012

Expressed in Thousands of US 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)	2013 2,582 $ 413,873 95 50 256,166 4,106	2012
		5,372 $ 376,656 40,017 36 40,068 6,332
TOTAL	676,872 $	468,481 $
LIABILITIES AND UNCOMMITTED BALANCES ACCOUNTS PAYABLE AND OTHER LIABILITIES (Note D) 530 $ UNDISBURSED COMMITMENTS (Notes E and G) 346,748 TOTAL LIABILITIES 347,278 UNCOMMITTED BALANCES (TASF-2 and TASF-4) (Note F), represented by: Unrestricted net assets 329,594		208 $ 327,107
		327,315 141,166
TOTAL 676,872 $		468,481 $

The accompanying notes are an integral part of these financial statements (TASF-6).

134

TASF-2

ASIAN DEVELOPMENT BANK—TECHNICAL ASSISTANCE SPECIAL FUND STATEMENT OF ACTIVITIES AND CHANGES IN NET ASSETS For the Years Ended 31 December 2013 and 2012

Expressed in Thousands of US Dollars

CHANGES IN UNRESTRICTED NET ASSETS CONTRIBUTIONS (TASF-4) (Note F) REVENUE From investments (Note C) From other sources Total EXPENSES Technical assistance—net (TASF-5) (Note E) Financial expenses Total CONTRIBUTIONS AND REVENUE IN EXCESS OF (LESS THAN) EXPENSES EXCHANGE LOSSES—net INCREASE (DECREASE) IN NET ASSETS NET ASSETS AT BEGINNING OF YEAR	2013 378,103 $ 2,501 255 380,859 133,343 11 133,354 247,505 (59,077) 188,428 141,166	2012
		44,323 $ 2,977 310
		47,610
		128,290 19
		128,309
		(80,699) (3,246)
		(83,945) 225,111
NET ASSETS AT END OF YEAR	329,594 $	141,166 $

The accompanying notes are an integral part of these financial statements (TASF-6).

135

TASF-3

ASIAN DEVELOPMENT BANK—TECHNICAL ASSISTANCE SPECIAL FUND STATEMENT OF CASH FLOWS For the Years Ended 31 December 2013 and 2012

Expressed in Thousands of US 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 (Decrease) Increase in Due from Banks Due from Banks at Beginning of Year Due from Banks at End of Year RECONCILIATION OF INCREASE (DECREASE) IN NET ASSETS TO NET CASH PROVIDED BY OPERATING ACTIVITIES: Increase (Decrease) in net assets (TASF-2) Adjustments to reconcile increase (decrease) in net assets to net cash provided by operating activities: Change in accrued revenue Change in due from contributors Change in advances for grants and other assets Change in accounts payable and other liabilities Change in undisbursed commitments Exchange losses—net Net Cash Provided by Operating Activities	2013 116,169 $ 2,486 255 (111,134) (11) 7,765 18,076,728 (18,123,456) 4,522,508 (4,486,407) (10,627) 72 (2,790) 5,372 2,582 $ 188,428 $ (16) (250,490) 2,535 335 19,641 47,332 7,765 $	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 $

The accompanying notes are an integral part of these financial statements (TASF-6).

136

TASF-4

ASIAN DEVELOPMENT BANK—TECHNICAL ASSISTANCE SPECIAL FUND STATEMENT OF RESOURCES 31 December 2013

Expressed in Thousands of US Dollars

STATEMENT OF RESOURCES 31 December 2013 Expressed in Thousands of US Dollars
Contributor	Contributions Committed During 2013	Direct Voluntary Regularized Contributions Replenishment1		Total Contributions
Australia Austria Bangladesh Belgium Brunei Darussalam Canada China, People's Republic of Denmark Finland France Germany Hong Kong, China India Indonesia Ireland Italy Japan Kazakhstan Korea, Republic of Luxembourg Malaysia Nauru The 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	49,595 $ 3,413 – 2,667 468 14,812 3,555 – 2,240 9,867 15,340 2,618 188 – 2,133 14,312 160,743 411 12,862 896 757 – 6,400 2,579 3,543 70 – 689 – – 6,293 4,194 1,767 384 457 24,851 – 348,103 30,000	2,484 $ 159 47 1,394 – 3,346 1,600 1,963 237 1,697 3,315 100 4,333 250 – 774 47,710 – 1,900 – 909 – 1,337 1,096 3,279 2,016 – 1,100 190 6 861 1,035 200 – – 5,617 1,500 90,457	103,008 $ 10,590 – 8,541 918 58,123 8,367 5,750 6,984 43,729 59,849 6,127 – 40 5,777 36,653 448,028 411 33,378 1,505 1,574 67 26,885 7,406 11,439 – 3,595 1,400 16,564 – 18,225 13,508 5,222 876 3,695 64,299 102,120 1,114,652	105,493 $ 10,749 47 9,935 918 61,469 9,967 7,713 7,221 45,426 63,164 6,227 4,333 290 5,777 37,427 495,739 411 35,278 1,505 2,483 67 28,222 8,502 14,718 2,016 3,595 2,500 16,754 6 19,086 14,543 5,422 876 3,695 69,915 103,620
				1,205,109 (3,472) 879,000 192,631
TOTAL	378,103 $			2,273,269 $

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, 333 and 357 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).

137

TASF-5

ASIAN DEVELOPMENT BANK—TECHNICAL ASSISTANCE SPECIAL FUND SUMMARY STATEMENT OF TECHNICAL ASSISTANCE APPROVED AND EFFECTIVE For the Year Ended 31 December 2013

Expressed in Thousands of US Dollars

Recipient	Project Preparation	Advisory	Research and Development	Policy and Advisory	Capacity Development	Total
Afghanistan Armenia Azerbaijan Bangladesh Bhutan Cambodia China, People's Republic of Cook Islands Fiji Georgia India Indonesia Kazakhstan Kiribati Kyrgyz Republic Lao People’s Democratic Republic Maldives Micronesia, Federated States of Mongolia Myanmar Nauru Nepal Pakistan Palau Papua New Guinea Philippines Samoa Solomon Islands Sri Lanka Tajikistan Thailand Timor-Leste Uzbekistan Vanuatu Viet Nam Regional Total Regional Activities	1,486 $ 606 (39) 2,000 (18) 2,948 7,718 – – 1,000 5,551 – 1,151 – 1,226 606 400 – – 1,000 – 800 6,050 – (163) 1,865 750 – 2,683 500 – 323 710 750 1,691 (24)	– $ – – – – – (252) – – – (340) (126) – – – – – – – – – (182) – – – (305) – – – – – – (218) – (186) –	– $ – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – 10,538	925 $ 500 – 905 – 56 4,537 – – – (54) – 500 – – 900 – 225 274 1,500 – – 200 – 1,225 813 – – – (5) (53) – 842 – 1,813 7,831	1,200 $ (23) – (88) 2,151 1,436 2,668 110 800 – 2,460 1,127 – 220 1,975 (500) 100 – 300 3,590 (6) 928 550 (4) – 2,635 400 (14) 1,312 725 (39) 1,452 2,580 225 500 31,042	3,611 $ 1,082 (39) 2,817 2,133 4,440 14,671 110 800 1,000 7,617 1,001 1,651 220 3,201 1,006 500 225 574 6,090 (6) 1,546 6,800 (4) 1,062 5,008 1,150 (14) 3,995 1,220 (92) 1,775 3,914 975 3,818 49,386
	41,570 $	(1,610) $	10,538 $	22,934 $	59,811 $	133,244 100
TOTAL						133,343 $

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 (Note E). The accompanying notes are an integral part of these financial statements (TASF-6).

138

TASF-6

ASIAN DEVELOPMENT BANK—TECHNICAL ASSISTANCE SPECIAL FUND NOTES TO FINANCIAL STATEMENTS 31 December 2013 and 2012

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 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 replenishment provides substantial resources to the ADF to finance ADB’s concessional program, and to the TASF to finance technical assistance operations. Total replenishment size was SDR8,065 million, of which SDR3,067 million will come from new donor contributions. The donors agreed to allocate 3% of the total replenishment size (equivalent to about 8% of total donor contributions) to TASF. The replenishment became effective on 4 June 2013. As of 31 December 2013, ADB had received instruments of contribution from 27 donors with the total amount equivalent to SDR2,778 million including qualified contributions amounting to SDR138 million.

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 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 US dollar is the functional and reporting currency, representing the currency of the primary economic operating environment of TASF.

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), Asia Pacific Disaster Response Fund (APDRF), and Financial Sector Development Partnership Special Fund (FSDPSF).

139

TASF-6

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 the 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.” 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 re-pledged.

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.

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, “Fair Value Measurement” 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.

140

TASF-6

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 December 2011, the FASB issued Accounting Standards Update (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. Subsequently, FASB issued ASU 2013-01 in January 2013 to clarify the scope of ASU 2011-11. The guidance is effective from quarter ended 31 March 2013 for ADB. These ASUs did not impact TASF’s financial statements.

In April 2013, the FASB issued ASU 2013-06, “Not-for-Profit Entities (Topic 958),” to require a recipient not-for-profit entity to recognize all services received from personnel of an affiliate that directly benefit the recipient not-for-profit entity. Those services should be measured at the cost recognized by the affiliate for the personnel providing those services. The amendments in this Update are effective prospectively for fiscal years beginning after 15 June 2014, and interim and annual periods thereafter. ADB is currently assessing the impact of this ASU on TASF’s financial statements.

In April 2013, the FASB issued ASU 2013-07, “Presentation of Financial Statements (Topic 205) – Liquidation Basis of Accounting,” to require an entity to prepare its financial statements using the liquidation basis of accounting when liquidation is imminent. The amendments are effective for entities that determine liquidation is imminent during annual reporting periods beginning after 15 December 2013, and interim reporting periods therein. This ASU is not expected to impact TASF’s financial statements.

141

TASF-6

continued

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.

All investments held as of 31 December 2013 and 2012 were in time deposits.

The currency composition of the investment portfolio as of 31 December 2013 and 2012 expressed in US dollars was as follows:

($thousand)
Currency US dollar Australian dollar Pound sterling Canadian dollar Total	2013 2012 $ 296,044 268,108 $ 60,478 58,967 30,717 24,808 26,634 24,773 413,873 $ 376,656 $

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 0.61% (0.73% – 2012).

Fair Value Disclosure

The fair value of INVESTMENTS and related financial assets as of 31 December 2013 and 2012 was as follows:

($ thousand)

31 December 2013 413,873 $ 95 413,968 $	Fair Value Measurements	Fair Value Measurements
	Level 1 – $ – – $	Level 2 Level 3 413,873 $ – $ 95 – 413,968 $ – $

142

TASF-6

continued

($ thousand)

($thousand)
Investments Time deposits Securities purchased under resale arrangements Total at fair value	31 December 2012 376,656 $ 40,017 416,673 $	Fair Value Measurements
		Level 1 – $ – – $	Level 2 Level 3 376,656 $ – $ 40,017 – 416,673 $ – $

ADB maintains documented processes and internal controls to value investment securities. If available, investment securities are fair valued based on active market quotes. Time deposits are reported at cost, which approximates fair value.

NOTE D—RELATED PARTY TRANSACTIONS

The OCR and special funds resources are at all times used, committed, and invested entirely separately from each other. Under ADF IX, ADF X, and ADF XI, a specific portion of the total contributions under each is to be allocated to the TASF as third, fourth and fifth regularized replenishments, respectively. ADF receives the contributions from members and subsequently transfers the specified portion to the 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 the TASF and the other funds.

The interfund account balances included in ADVANCES FOR GRANTS AND OTHER ASSETS and ACCOUNTS PAYABLE AND OTHER LIABILITIES are as follows:

($thousand)
Receivable from: Ordinary capital resources Regional Cooperation and Integration Fund Climate Change Fund Agency Trust Funds—net Total Payable to: Ordinary capital resources Regional Cooperation and Integration Fund Agency Trust Funds—net Total	2013 2012 – $ 2 $ 9 – 9 33 – 53 18 $ 88 $ 91 $ – $ – 53 392 – 483 $ 53 $

143

TASF-6

continued

NOTE E—UNDISBURSED COMMITMENTS

Undisbursed commitments are denominated in US dollars and represent effective ongoing grant-financed TA projects/programs which are not yet disbursed and unliquidated as of the end of the year. During 2013, $15,490,000 ($19,162,000 – 2012) 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 2013, TASF received direct and voluntary contributions from India amounting to Rs10,000,000 ($188,000 equivalent) and Pakistan amounting to $70,000.

In 1986, 1992, 2005, 2009 and 2013, 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, $221,000,000, $339,000,000 and $341,000,000, respectively, to be used for technical assistance to ADF borrowing DMCs and for regional technical assistance. During the year, the fund received $97,355,000 ($12,157,000 – ADF X; $85,198,000 – ADF XI) in cash and promissory notes, leaving a total of $256,165,000 ($8,211,000 – ADF IX; $26,874,000 – ADF X; $221,080,000 – ADF XI) as DUE FROM CONTRIBUTORS.

In 2013, $30,000,000 was allocated from OCR net income to TASF bringing the accumulated allocation from OCR net income to $879,000,000.

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 2013 and 2012 were without any restrictions.

Uncommitted balances comprise amounts which have not been committed by ADB as of 31 December 2013 and 2012. These balances include approved TA projects/programs that are not yet effective.

NOTE G—OTHER FAIR VALUE DISCLOSURES

As of 31 December 2013 and 2012, 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 amount of TASF’s assets and liabilities is considered to approximate fair value.

NOTE H—SUBSEQUENT EVENTS

ADB has evaluated subsequent events after 31 December 2013 through 12 March 2014, 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 2013.

144

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 2013. 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 (1992). Based on that assessment, management believes that as of 31 December 2013, ADB's internal control over financial reporting is effective based upon the criteria established in Internal Control – Integrated Framework (1992).

Takehiko Nakao President

Thierry de Longuemar

Vice-President (Finance and Risk Management)

Simon T. Bradbury Controller

12 March 2014

145

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Deloitte & Touche LLP Unique Entity No. T08LL0721A 6 Shenton Way #32-00 OUE Downtown 2 Singapore 068809

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

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, 2013, based on the criteria established in Internal Control — Integrated Framework (1992) 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.

Deloitte & Touche LLP (Unique Entity No. T08LL0721A) is an accounting limited liability partnership registered in Singapore under the Limited Liability Partnerships Act (Chapter 163A).

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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, 2013, is fairly stated, in all material respects, based on the criteria established in Internal Control — Integrated Framework (1992) 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, 2013 and 2012 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 12, 2014 expressed an unqualified opinion on those financial statements.

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Public Accountants and Chartered Accountants Singapore

March 12, 2014

147

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Deloitte & Touche LLP Unique Entity No. T08LL0721A 6 Shenton Way #32-00 OUE Downtown 2 Singapore 068809

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

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, 2013 and 2012, 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.

Deloitte & Touche LLP (Unique Entity No. T08LL0721A) is an accounting limited liability partnership registered in Singapore under the Limited Liability Partnerships Act (Chapter 163A).

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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, 2013 and 2012, 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, 2013, based on the criteria established in Internal Control — Integrated Framework (1992) issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated March 12, 2014 expressed an unqualified opinion on management’s assertion that ADB maintained effective internal control over financial reporting.

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Public Accountants and Chartered Accountants Singapore

March 12, 2014

149

JSF-1

ASIAN DEVELOPMENT BANK—JAPAN SPECIAL FUND STATEMENT OF FINANCIAL POSITION 31 December 2013 and 2012

Expressed in Thousands of US Dollars

ASSETS DUE FROM BANKS INVESTMENTS (Notes C and G) Government or government-guaranteed obligations Time deposits ACCRUED REVENUE ADVANCES FOR TECHNICAL ASSISTANCE AND OTHER ASSETS (Note D)	2013	2013	2013	2012	2012	2012
	JSF Regular and ACCSF Supplementary Total 181 $ 631 $ 812 $ – – – 36,687 75,846 112,533 36,687 75,846 112,533 2 3 5 – 85 85			JSF Regular and ACCSF Supplementary Total 185 $ 384 $ 569 $ 3,000 19,994 22,994 33,616 61,925 95,541 36,616 81,919 118,535 2 5 7 – 1,419 1,419
	181 $ – 36,687	631 $ – 75,846	812 $ – 112,533	185 $ 3,000 33,616	384 $ 19,994 61,925	569 $ 22,994 95,541
	36,687	75,846	112,533	36,616	81,919	118,535
	2 –	3 85	5 85	2 –	5 1,419	7 1,419
TOTAL	36,870 $	76,565 $	113,435 $	36,803 $	83,727 $	120,530 $
LIABILITIES AND NET ASSETS ACCOUNTS PAYABLE AND OTHER LIABILITIES (Note D) UNDISBURSED COMMITMENTS (Notes E and G) TOTAL LIABILITIES NET ASSETS (JSF-2), represented by: Uncommitted balances (Note F) Unrestricted Temporarily restricted Net accumulated investment income (Note F) Temporarily restricted	0 $ –	52 $ 13,879	52 $ 13,879	0 $ –	49 $ 22,409	49 $ 22,409
	–	13,931	13,931	–	22,458	22,458
	– 28,199	62,634 –	62,634 28,199	– 28,199	61,269 –	61,269 28,199
	28,199 8,671	62,634 –	90,833 8,671	28,199 8,604	61,269 –	89,468 8,604
	36,870	62,634	99,504	36,803	61,269	98,072
TOTAL	36,870 $	76,565 $	113,435 $	36,803 $	83,727 $	120,530 $

0 = Less than $500.

The accompanying notes are an integral part of these financial statements (JSF-4).

150

JSF-2

ASIAN DEVELOPMENT BANK—JAPAN SPECIAL FUND STATEMENT OF ACTIVITIES AND CHANGES IN NET ASSETS For the Years Ended 31 December 2013 and 2012

Expressed in Thousands of US 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 GAINS (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		2013	2013		2012	2012
	ACCSF	JSF Regular and Supplementary Total 147 $ 147 $ 0 – – 0 147 147 (1,484) (1,484) 277 277 (1,207) (1,207) 1,354 1,354 11 11 1,365 1,365 – 67 – (0) – 67 1,365 1,432 61,269 98,072		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
	– $ – 0	147 $ 0 –	147 $ – 0	– $ – 0	176 $ 5 –	176 $ 5 0
	0	147	147	0	181	181
	– 0	(1,484) 277	(1,484) 277	– 0	(3,986) 316	(3,986) 316
	0	(1,207)	(1,207)	0	(3,670)	(3,670)
	– –	1,354 11	1,354 11	– –	3,851 (5)	3,851 (5)
	–	1,365	1,365	–	3,846	3,846
	67 (0)	– –	67 (0)	93 (0)	– –	93 (0)
	67	–	67	93	–	93
	67 36,803	1,365 61,269	1,432 98,072	93 36,710	3,846 57,423	3,939 94,133
NET ASSETS AT END OF YEAR	36,870 $	62,634 $	99,504 $	36,803 $	61,269 $	98,072 $

0 = Less than $500. The accompanying notes are an integral part of these financial statements (JSF-4).

151

JSF-3

ASIAN DEVELOPMENT BANK—JAPAN SPECIAL FUND STATEMENT OF CASH FLOWS For the Years Ended 31 December 2013 and 2012 Expressed in Thousands of US 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 Net (Decrease) Increase 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: Unrealized investment losses (gains) Change in accrued revenue Change in advances for technical assistance and other assets Change in accounts payable and other liabilities Change in undisbursed commitments Exchange (gains) losses—net Net Cash Provided by (Used in) Operating Activities		2013	Total 209 $ 0 (5,699) (275) (5,765) 5,454,894 (5,448,886) 6,008 243 569 812 $ 1,432 $ (6) 2 1,338 4 (8,529) (6) (5,765) $		2012
	ACCSF 67 $ 0 – (0) 67 1,848,372 (1,848,443) (71) (4) 185 181 $ 67 $ 0 0 – (0) – – 67 $	JSF Regular and Supplementary 142 $ 0 (5,699) (275) (5,832) 3,606,522 (3,600,443) 6,079 247 384 631 $ 1,365 $ (6) 2 1,338 4 (8,529) (6) (5,832) $		ACCSF 85 $ 0 – (1) 84 1,813,708 (1,813,779) (71) 13 172 185 $ 93 $ (9) 1 – (1) – – 84 $	JSF Regular and Supplementary 181 $ 5 (11,667) (316) (11,797) 3,634,964 (3,622,999) 11,965 168 216 384 $ 3,846 $ 6 (1) 385 (13) (16,023) 3 (11,797) $	Total
						266 $ 5 (11,667) (317)
						(11,713)
						5,448,672 (5,436,778)
						11,894
						181 388
						569 $
						3,939 $ (3) (0) 385 (14) (16,023) 3
						(11,713) $

0 = Less than $500.

The accompanying notes are an integral part of these financial statements (JSF-4).

152

JSF-4

ASIAN DEVELOPMENT BANK—JAPAN SPECIAL FUND NOTES TO FINANCIAL STATEMENTS 31 December 2013 and 2012

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), Asia Pacific Disaster Response Fund (APDRF), and Financial Sector Development Partnership Special Fund (FSDPSF).

153

JSF-4

continued

Functional and Reporting Currency

The US 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 the 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, “Fair Value Measurement” 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).

154

JSF-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 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 April 2013, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2013-06, “Not-for-Profit Entities (Topic 958),” to require a recipient not-for-profit entity to recognize all services received from personnel of an affiliate that directly benefit the recipient not-for-profit entity. Those services should be measured at the cost recognized by the affiliate for the personnel providing those services. The amendments in this Update are effective prospectively for fiscal years beginning after 15 June 2014, and interim and annual periods thereafter. ADB is currently assessing the impact of this ASU on JSF’s financial statements.

In April 2013, the FASB issued ASU 2013-07, “Presentation of Financial Statements (Topic 205) – Liquidation Basis of Accounting,” to require an entity to prepare its financial statements using the liquidation basis of accounting when liquidation is imminent. The amendments are effective for entities that determine liquidation is imminent during annual reporting periods beginning after 15 December 2013, and interim reporting periods therein. This ASU is not expected to impact 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.

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.

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 0.18% and 0.19%, respectively (0.25% and 0.21%, respectively – 2012).

155

JSF-4

continued

Fair Value Disclosure

The fair value of INVESTMENTS as of 31 December 2013 and 2012 was as follows:

($ thousand)

Investments Time deposits	31 December 2013 112,533 $	Fair Value Measurements	Fair Value Measurements
		Level 1 – $	Level 2 Level 3 112,533 $ – $
($thousand)
Investments Government or government- guaranteed obligations Time deposits Total at fair value	31 December 2012 22,994 $ 95,541 118,535 $	Fair Value Measurements
		Level 1 22,994 $ – 22,994 $	Level 2 Level 3 – $ – $ 95,541 – 95,541 $ – $

ADB maintains documented processes and internal controls to value investment securities. If available, investment securities are fair valued based on active market quotes. These include government or government-guaranteed obligations. Time deposits are reported at cost, which approximates fair value.

NOTE D—RELATED PARTY TRANSACTIONS

The OCR and special funds resources are at all times used, committed, and invested entirely separately 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:

($ thousand)

JSF from: Regional Cooperation Integration Fund JSF to: Ordinary capital resources Regional Cooperation and Integration Fund Agency Trust Funds—net Total Amounts Receivable by: Amounts Payable by:	2013 2012 2 $ – $ 17 $ 25 $ – 7 9 – 26 $ 32 $

156

JSF-4

continued

NOTE E—UNDISBURSED COMMITMENTS

Undisbursed commitments are denominated in US dollars and represent effective TA projects/programs not yet disbursed and unliquidated. Completed but partially cancelled TA projects amounting to $1,484,000 were written back as a reduction in technical assistance during 2013 ($4,836,000 – 2012), and the corresponding undisbursed commitments were eliminated. None of this amount corresponds to ACCSF (nil – 2012). 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.

Uncommitted balances comprise amounts which have not been committed by ADB as of 31 December 2013 and 2012. These balances include approved TA projects/programs that are not yet effective. As of 31 December 2013 and 2012 these balances were as follows:

($thousand)
Uncommitted balances TA projects/programs approved by Japan and not yet effective Uncommitted balances available for new commitments		2013	Total 90,833 $ (470) 90,363 $		2012
	ACCSF	JSF Regular and Supplementary		ACCSF	JSF Regular and Supplementary Total 61,269 $ 89,468 $ (470) (470) 60,799 $ 88,998 $
	28,199 $ –	62,634 $ (470)		28,199 $ –
	28,199 $	62,164 $		28,199 $

The temporarily restricted uncommitted balance remaining available as of 31 December 2013 corresponds to funds under ACCSF of $28,199,000 ($28,199,000 – 2012) and the amount of net accumulated investment income of $8,671,000 ($8,604,000 – 2012) 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 2013 and 2012, 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 amount of JSF’s assets and liabilities is considered to approximate fair value.

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NOTE H—SUBSEQUENT EVENTS

ADB has evaluated subsequent events after 31 December 2013 through 12 March 2014, 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 2013.

158

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Deloitte & Touche LLP Unique Entity No. T08LL0721A 6 Shenton Way #32-00 OUE Downtown 2 Singapore 068809

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

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, 2013 and 2012, 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.

Deloitte & Touche LLP (Unique Entity No. T08LL0721A) is an accounting limited liability partnership registered in Singapore under the Limited Liability Partnerships Act (Chapter 163A).

159

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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, 2013 and 2012, 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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Public Accountants and Chartered Accountants Singapore

March 12, 2014

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ADBI-1

ASIAN DEVELOPMENT BANK—ASIAN DEVELOPMENT BANK INSTITUTE STATEMENT OF FINANCIAL POSITION 31 December 2013 and 2012

Expressed in Thousands of US 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	3,077 $ 5,421 3,312 $ 3,179 133 6,392 1,522 316 2013	2012
		3,390 $ 6,514 3,886 $ 3,809 77 7,818 1,862 712
TOTAL	16,861 $	20,373 $
LIABILITIES AND UNCOMMITTED BALANCES ACCOUNTS PAYABLE AND OTHER LIABILITIES Accrued pension and postretirement medical benefit costs (Note K) Asset reinstatement obligations (Note F) Others (Note J) UNCOMMITTED BALANCES (ADBI-2) Unrestricted net assets	5,787 $ 1,029 853 7,669 $ 9,192	7,405 $ 1,258 1,373 10,036 $ 10,337
TOTAL	16,861 $	20,373 $

The accompanying notes are an integral part of these financial statements (ADBI-4).

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ADBI-2

ASIAN DEVELOPMENT BANK—ASIAN DEVELOPMENT BANK INSTITUTE STATEMENT OF ACTIVITIES AND CHANGES IN NET ASSETS For the Years Ended 31 December 2013 and 2012

STATEMENT OF ACTIVITIES AND CHANGES IN NET ASSETS For the Years Ended 31 December 2013 and 2012
Expressed in Thousands of US 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 (LESS THAN) IN EXCESS OF EXPENSES EXCHANGE LOSSES—net TRANSLATION ADJUSTMENTS PENSION/POST RETIREMENT LIABILITY ADJUSTMENT - ASC 715 AND 958 (Note K) (DECREASE) INCREASE IN NET ASSETS NET ASSETS AT BEGINNING OF YEAR	2013 13,110 $ 398 4 57 13,569 10,883 4,057 14,940 (1,371) (905) (1,226) 2,357 (1,145) 10,337	2012
		18,490 $ 473 5 40
		19,008
		11,583 5,408
		16,991
		2,017 (446) (845) (225)
		501 9,836
NET ASSETS AT END OF YEAR	9,192 $	10,337 $

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 2013 and 2012

Expressed in Thousands of US Dollars

CASH FLOWS FROM OPERATING ACTIVITIES Contributions received Interest on investments received Expenses paid Others—net Net Cash (Used in) Provided by Operating Activities CASH FLOWS FROM INVESTING ACTIVITIES 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 (Decrease) Increase in Due from Banks Due from Banks at Beginning of Year Due from Banks at End of Year RECONCILIATION OF (DECREASE) INCREASE IN UNRESTRICTED NET ASSETS TO NET CASH (USED IN) PROVIDED BY OPERATING ACTIVITIES: (Decrease) Increase in unrestricted net assets (ADBI-2) Adjustments to reconcile (decrease) increase in unrestricted net assets to net cash (used in) provided by operating activities: Depreciation Change in due from contributors Change in long-term guarantee deposits Change in other assets Change in accrued pension and postretirement medical benefit costs Change in asset reinstatement obligations Change in other liabilities Translation adjustments Net Cash (Used in) Provided by Operating Activities	2013 14,289 $ 4 (14,146) (451) (304) 2,195,411 (2,196,041) (135) (765) 756 (313) 3,390 3,077 $ (1,145) $ 70 1,179 340 395 (1,618) (230) (521) 1,226 (304) $	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
		3,290 $

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 2013 and 2012

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 yen. The reporting currency is the US dollar.

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), Asia Pacific Disaster Response Fund (APDRF), and Financial Sector Development Partnership Special Fund (FSDPSF).

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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 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 yen are translated into 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.” 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, “Fair Value Measurement” 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).

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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 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 December 2011, the FASB issued Accounting Standards Update (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. Subsequently, FASB issued ASU 2013-01 in January 2013 to clarify the scope of ASU 2011-11. The guidance is effective from quarter ended 31 March 2013 for the Institute. These ASUs did not impact the Institute’s financial statements.

In April 2013, the FASB issued ASU 2013-06, “Not-for-Profit Entities (Topic 958),” to require a recipient not-for-profit entity to recognize all services received from personnel of an affiliate that directly benefit the recipient not-for-profit entity. Those services should be measured at the cost recognized by the affiliate for the personnel providing those services. The amendments in this Update are effective prospectively for fiscal years beginning after 15 June 2014, and interim and annual periods thereafter. The Institute is currently assessing the impact of this update on its financial statements.

In April 2013, the FASB issued ASU 2013-07, “Presentation of Financial Statements (Topic 205) – Liquidation Basis of Accounting,” to require an entity to prepare its financial statements using the liquidation basis of accounting when liquidation is imminent. The amendments are effective for entities that determine liquidation is imminent during annual reporting periods beginning after 15 December 2013, and interim reporting periods therein. This ASU is not expected to impact the Institute’s 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 0.04% (0.05% – 2012).

Fair Value Disclosure

The fair value of SECURITIES PURCHASED UNDER RESALE ARRANGEMENTS as of 31 December 2013 and 2012 was as follows:

($ thousand)

($thousand)
Securities purchased under resale arrangements ($thousand)		Fair Value Measurements
	31 December 2013	Level 1	Level 2	Level 3
	5,421 $	– $	5,421 $	– $
Securities purchased under resale arrangements		Fair Value Measurements
	31 December 2012	Level 1	Level 2	Level 3
	6,514 $	– $	6,514 $	– $

The Institute maintains documented processes and internal controls to value the investment securities. If available, investment securities are fair valued based on active market quotes.

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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 2013 and 2012, as well as information pertaining to accumulated depreciation, were as follows:

($thousand)
Cost: Balance, 1 January 2013	Property, Furniture and Equipment
	One-time establishment cost Furniture Equipment Leased Property	Grand Total
	3,314 $ 70 $ 247 $ 255 $	3,886 $
Additions during the year Disposals during the year Translation adjustments Balance, 31 December 2013	– – 135 – – – – – (605) (13) (45) (46)	135 – (709)
	2,709 57 337 209	3,312
Accumulated Depreciation:
Balance, 1 January 2013 Depreciation during the year Disposals during the year Translation adjustments Balance, 31 December 2013 Net Book Value, 31 December 2013	3,314 70 170 255 – – 70 – – – – – (605) (13) (36) (46)	3,809 70 – (700)
	2,709 57 204 209	3,179
	– $ – $ 133 $ – $	133 $

($ thousand)

($thousand)
Cost: Balance, 1 January 2012	Property, Furniture and Equipment
	One-time establishment cost Furniture Equipment Leased Property	Grand Total
	3,704 $ 78 $ 276 $ 286 $	4,344 $
Additions during the year Disposals during the year Translation adjustments Balance, 31 December 2012	– – – – – – – – (390) (8) (29) (31)	– – (458)
	3,314 70 247 255	3,886
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 78 121 286 – – 67 – – – – – (390) (8) (18) (31)	4,189 67 – (447)
	3,314 70 170 255	3,809
	– $ – $ 77 $ – $	77 $

Total depreciation expense incurred for the year ended 31 December 2013 amounted to $70,000 ($67,000 – 2012).

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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 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 to 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).

In June 2013, the Government of Japan committed its 21st contribution to the Institute amounting to ¥672,070,000 ($6,779,000 equivalent).

In December 2013, the Government of Japan committed its 22nd contribution to the Institute amounting to ¥672,070,000 ($6,392,000 equivalent). As at 31 December 2013, the amount committed was reported in the Statement of Financial Position as DUE FROM CONTRIBUTORS.

NOTE H—REVENUE FROM RENTAL

Revenue from rental in 2013 consists of sublease rental income of $398,000 ($473,000 – 2012), 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 2013 and 2012 were $3,356,000 and $4,044,000, respectively. As of 31 December 2013, 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:

($thousand)
Year ending 31 December	Minimum future rentals
2014	761 $

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NOTE J—RELATED PARTY TRANSACTIONS

As of 31 December 2013, $101,000 was net payable to OCR ($138,000 – 2012) which is included in ACCOUNTS PAYABLE and OTHER LIABILITIES–Others. 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 the highest average remuneration during two years of eligible service. The Plan assets are segregated in a separate fund. 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 2014, based on the Institute’s contribution rate for the coming year of 21%, and the participants’ mandatory contribution are $380,000 and $60,000 respectively (2013 – $330,000 and $58,000).

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 2013, the net return on the Plan assets was 16.7% (13.6% – 2012). ADB expects the long-term rate of return on the assets to be 7.5% (7.5% – 2012).

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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 2013 and 2012. 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 2013 and 2012:

($ thousand)

($thousand)
Change in benefit obligation: Projected benefit obligation at beginning of year Service cost Interest cost Plan participants’ contributions Actuarial (gain) loss 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 Funded Status	Pension	Benefits	Postretirement Medical Benefits
	2013 10,924 $ 440 483 153 (1,464) (212) 10,324 $ 3,958 $ 680 360 153 (212) 4,939 $ (5,385) $	2012	2013 2012 438 $ 458 $ 146 108 25 28 – – (182) (130) (25) (26) 402 $ 438 $ – $ – $ – – 25 26 – – (25) (26) – $ – $ (402) $ (438) $
		9,636 $ 283 492 125 894 (506)
		10,924 $
		3,540 $ 470 329 125 (506)
		3,958 $
		(6,966) $

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table continued

($ thousand)

($thousand)
	Pension	Benefits	Postretirement Medical Benefits
	2013	2012	2013	2012
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	– $ (5,385)	– $ (6,966)	– $ (402)	– $ (438)
	(5,385) $ 1,875 $ –	(6,966) $	(402) $ (386) $ –	(438) $
		4,069 $ –		(223) $ –
	1,875 $ 5.00%	4,069 $	(386) $ 5.00%	(223) $
		4.30%		4.30%
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%	N/A	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 2013 and 2012. The rate was assumed to decrease gradually to 5.0% through 2021 (5.0% through 2020 – 2012) and remain at that level thereafter. The following table summarizes the benefit costs associated with pension and postretirement medica benefits for the years ended 31 December 2013 and 2012:
($thousand)
Components of net periodic benefit cost: Service cost Interest cost Expected return on plan assets Recognized actuarial loss (gain) Net periodic benefit cost	Pension	Benefits	Postretirement Medical Benefits
	2013	2012	2013 2012 146 $ 108 $ 25 28 – – (19) (7) 152 $ 129 $
	440 $ 483 (292) 342	283 $ 492 (274) 351
	973 $	852 $

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 2013 and 2012. The rate was assumed to decrease gradually to 5.0% through 2021 (5.0% through 2020 – 2012) and remain at that level thereafter.

The following table summarizes the benefit costs associated with pension and postretirement medical benefits for the years ended 31 December 2013 and 2012:

The accumulated benefit obligation of the pension plan as of 31 December 2013 was $10,091,000 ($10,660,000 – 2012).

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 $111,000. 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 $33,000.

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

($thousand)
Effect on total service and interest cost components Effect on postretirement benefit obligation	1-Percentage- 1-Percentage- Point Increase Point Decrease 46 $ (34) $ 94 (72)

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 2013:

($ thousand)

2014 2015 2016 2017 2018 2019–2023	Pension Postretirement Benefits Medical Benefits 529 $ 0 $ 366 0 399 1 455 9 580 17 3,462 133

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 2013 and 2012 were reported based on the following:

($ thousand)

($thousand)
		Fair Value Measurements
	31 December 2013	Level 1	Level 2	Level 3
Cash and cash equivalents	75 $	– $	75 $	– $
Common/preferred stocks	1,171	1,171	–	0
Investment funds Government or government- guaranteed securities Corporate debt securities Mortgage/asset-backed securities:	2,409 618 503	2,409 613 493	– 1 7	– 4 3
Mortgage-backed securities	84	29	55	0
Collateralized mortgage obligations Asset-backed securities Short-term investments	25 4 79	– – 22	13 3 57	12 1 –
Derivatives	1	1	0	–
Other asset/liabilities a—net	(30)	–	(30)	–
Total fair value of plan assets 0 = Less than $500.	4,939 $	4,738 $	181 $	20 $
aIncudes receivables and liabilities carried at	amounts that approximate fair value.

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($ thousand)

($thousand)
		Fair Value Measurements
	31 December 2012	Level 1	Level 2	Level 3
Cash and cash equivalents	133 $	– $	133 $	– $
Common/preferred stocks	927	927	–	0
Investment funds Government or government- guaranteed securities Corporate debt securities	1,630 481 476	1,630 464 431	– 17 21	– – 24
Mortgage/asset-backed securities:
Mortgage-backed securities	141	76	65	0
Collateralized mortgage obligations	12	0	5	7
Asset-backed securities Short-term investments	3 212	– 52	3 160	– –
Derivatives	0	1	(1)	0
Other asset/liabilitiesa—net	(57)	–	(57)	–
Total fair value of plan assets 0 = Less than $500.	3,958 $	3,581 $	346 $	31 $

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

The Plan’s investment committee and SRP investment unit meet periodically and are involved in overseeing the activities and performance of the investment portfolios. The fair value of the Plan investments is provided by the Plan’s global custodian from various independent pricing providers. The accounting division in coordination with data management unit of treasury services division evaluates the fair value in determining the hierarchy level. All investments including equity securities, fixed income securities and derivatives are provided by independent pricing providers. Equity securities include common and preferred stocks and mutual funds. Fixed income securities include government or government-guaranteed securities, corporate obligations, asset and mortgage-backed securities, and short-term investments. Derivatives include futures, swaps and currency forward contracts.

The table below provides details of transfers between Levels 1 and 2 for the years ended 31 December 2013 and 2012:

($thousand)
	2013		2012
Investments	Level 1	Level 2	Level 1 Level 2
Government or government-
guaranteed securities
Transfers into (out of)	11 $	(11) $	(9) $ 9 $
Corporate debt securities
Transfers into (out of)	9	(9)	35 (35)
Mortgaged/asset-backed securities
Transfers (out of) into	(2)	2 (18) $	(40) 40 (14) $ 14 $
	18 $

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

174

ADBI-4

continued

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 2013 and 2012:

($ thousand)

Balance, 31 December 2012 Total realized/unrealized (losses)/gains in: Net decrease in net assets available for benefits Purchases Sales/Maturities Settlement and others Transfers into Level 3 Balance, 31 December 2013 Total unrealized gains (losses) 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 $ 0 $	Government or gov't.-guaranteed securities – $ (0) 4 – – – 4 $ (0) $	Corporate debt securities 24 $ (0) 2 (23) (0) – 3 $ (0) $	Mortgage/ Asset-backed securities Derivatives 7 $ 0 $ (0) (0) 11 – (2) – (3) – 0 – 13 $ (0) $ (0) $ – $
($thousand)

Balance, 31 December 2011 Total realized/unrealized (losses)/gains in: Net increase (decrease) in net assets available for benefits Purchases Sales/Maturities Settlement and others Transfers (out of) into Level 3 Balance, 31 December 2012 Total unrealized 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 $ 0 – (10) – (3) – $ – $	Corporate debt securities 16 $ 1 4 (1) 0 4 24 $ 1 $	Mortgage/ Asset-backed securities Derivatives 18 $ 0 $ 0 (0) – – (1) – (4) – (6) – 7 $ 0 $ – $ 0 $

Transfers into and out of Level 3 in 2013 and 2012 are due to availability of market observable inputs.

NOTE L—OTHER FAIR VALUE DISCLOSURES

As of 31 December 2013 and 2012, 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.

175

ADBI-4

continued

NOTE M—SUBSEQUENT EVENTS

The Institute has evaluated subsequent events after 31 December 2013 through 12 March 2014, the date these Financial Statements are available for issuance. On 8 January 2014, the Institute received the 22nd contribution from the Government of Japan.

176

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 2013. 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 (1992). Based on that assessment, management believes that as of 31 December 2013, ADB's internal control over financial reporting is effective based upon the criteria established in Internal Control – Integrated Framework (1992).

Takehiko Nakao President

Thierry de Longuemar

Vice-President (Finance and Risk Management)

Simon T. Bradbury Controller

12 March 2014

177

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Deloitte & Touche LLP Unique Entity No. T08LL0721A 6 Shenton Way #32-00 OUE Downtown 2 Singapore 068809

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

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, 2013, based on the criteria established in Internal Control — Integrated Framework (1992) 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.

Deloitte & Touche LLP (Unique Entity No. T08LL0721A) is an accounting limited liability partnership registered in Singapore under the Limited Liability Partnerships Act (Chapter 163A).

178

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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, 2013, is fairly stated, in all material respects, based on the criteria established in Internal Control — Integrated Framework (1992) 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, 2013 and 2012 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 12, 2014 expressed an unqualified opinion on those financial statements.

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Public Accountants and Chartered Accountants Singapore

March 12, 2014

179

Deloitte & Touche LLP Unique Entity No. T08LL0721A 6 Shenton Way #32-00 OUE Downtown 2 Singapore 068809 

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

## **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, 2013 and 2012, 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. 

Deloitte & Touche LLP (Unique Entity No. T08LL0721A) is an accounting limited liability partnership registered in Singapore under the Limited Liability Partnerships Act (Chapter 163A). 

180 

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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, 2013 and 2012, 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, 2013, based on the criteria established in Internal Control — _Integrated Framework (1992)_ issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated March 12, 2014 expressed an unqualified opinion on management’s assertion that ADB maintained effective internal control over financial reporting. 

**==> picture [216 x 28] intentionally omitted <==**

Public Accountants and Chartered Accountants Singapore 

March 12, 2014 

181 

**PEF-1** 

## **ASIAN DEVELOPMENT BANK—PAKISTAN EARTHQUAKE FUND STATEMENT OF FINANCIAL POSITION 31 December 2013 and 2012** 

Expressed in Thousands of US Dollars 

|**ASSETS**<br>DUE FROM BANKS<br>INVESTMENTS (Notes C and G)<br>Time deposits<br>ACCRUED REVENUE<br>ADVANCES FOR GRANTS|**2013**<br>803<br>$ 17,460<br>7<br>–|**2012**|
|---|---|---|
|||699<br>$ 17,728<br>4<br>85|
|**TOTAL**|**18,270**<br>**$**|**18,516**<br>**$**|
|**LIABILITIES AND UNCOMMITTED BALANCES**<br>ACCOUNTS PAYABLE AND OTHER LIABILITIES (Note D)<br>UNDISBURSED COMMITMENTS (Notes E and G)<br>TOTAL LIABILITIES<br>UNCOMMITTED BALANCES (PEF-2) (Note F), represented by:<br>Unrestricted net assets|15<br>$ –<br>15<br>18,255|15<br>$ 14,074|
|||14,089<br>4,427|
|**TOTAL**|**18,270**<br>**$**|**18,516**<br>**$**|



The accompanying notes are an integral part of these financial statements (PEF-4). 

182 

**PEF-2** 

## **ASIAN DEVELOPMENT BANK—PAKISTAN EARTHQUAKE FUND STATEMENT OF ACTIVITIES AND CHANGES IN NET ASSETS For the Years Ended 31 December 2013 and 2012** 

Expressed in Thousands of US Dollars 

|**CHANGES IN UNRESTRICTED NET ASSETS**<br>REVENUE<br>From investments (Note C)<br>From other sources (Note E)<br>Total<br>EXPENSES<br>Administrative and financial expenses (Note D)<br>REVENUE IN EXCESS OF EXPENSES<br>EXCHANGE LOSSES—net<br>INCREASE (DECREASE) IN NET ASSETS<br>NET ASSETS AT BEGINNING OF YEAR|**2013**<br>296<br>$ 13,952<br>14,248<br>18<br>14,230<br>(402)<br>13,828<br>4,427|**2012**|
|---|---|---|
|||189<br>$ 216|
|||405|
|||128|
|||277<br>(403)|
|||(126)<br>4,553|
|**NET ASSETS AT END OF YEAR**|**18,255**<br>**$**|**4,427**<br>**$**|



The accompanying notes are an integral part of these financial statements (PEF-4). 

183 

**PEF-3** 

## **ASIAN DEVELOPMENT BANK—PAKISTAN EARTHQUAKE FUND STATEMENT OF CASH FLOWS For the Years Ended 31 December 2013 and 2012** 

Expressed in Thousands of US Dollars 

|CASH FLOWS FROM OPERATING ACTIVITIES<br>Interest on investments received<br>Net cash received from other sources<br>Grants disbursed<br>Administrative and financial expenses paid<br>Net Cash Provided by (Used in) Operating Activities<br>CASH FLOWS FROM INVESTING ACTIVITIES<br>Maturities of investments<br>Purchases of investments<br>Net Cash (Used in) Provided by Investing Activities<br>Effect of Exchange Rate Changes on Due from Banks<br>Net Increase in Due from Banks<br>Due from Banks at Beginning of Year<br>Due from Banks at End of Year|**2013**<br>293<br>$ 22<br>(59)<br>(18)<br>238<br>831,994<br>(832,081)<br>(87)<br>(47)<br>104<br>699<br>803<br>$|**2012**|
|---|---|---|
|||189<br>$ 215<br>(2,778)<br>(169)|
|||(2,543)|
|||592,060<br>(589,180)|
|||2,880|
|||(213)|
|||124<br>575|
|||699<br>$|



RECONCILIATION OF INCREASE (DECREASE) IN NET ASSETS TO NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES: 

|Increase (Decrease) in net assets (PEF-2)<br>Adjustments to reconcile increase (decrease) in net assets<br>to net cash provided by (used in) operating activities:<br>Change in accrued revenue<br>Change in advances for grants<br>Change in accounts payable and other liabilities<br>Change in undisbursed commitments<br>Exchange losses—net<br>Net Cash Provided by (Used in) Operating Activities|13,828<br>$ (3)<br>85<br>–<br>(14,074)<br>402<br>238<br>$|(126)<br>$ 0<br>2,879<br>(42)<br>(5,650)<br>396|
|---|---|---|
|||(2,543)<br>$|



0 = less than $500. 

The accompanying notes are an integral part of these financial statements (PEF-4). 

184 

**PEF-4** 

**ASIAN DEVELOPMENT BANK—PAKISTAN EARTHQUAKE FUND NOTES TO FINANCIAL STATEMENTS 31 December 2013 and 2012** 

## **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 were 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 was to 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. PEF was terminated on 30 June 2011 and all projects were financially completed as of 30 September 2013. PEF continued to remain open to complete actions necessary to wind up the fund. 

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. 

## _Functional and Reporting Currency_ 

The US dollar is the functional and reporting currency, representing the currency of the primary economic operating environment of PEF. 

> 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), Asia Pacific Disaster Response Fund (APDRF), and Financial Sector Development Partnership Special Fund (FSDPSF). 

185 

**PEF-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 the 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. These are included in ADVANCES FOR GRANTS. 

## _Fair Value of Financial Instruments_ 

ASC 820, “Fair Value Measurement” 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). 

186 

**PEF-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 April 2013, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2013-06, _“Not-for-Profit Entities (Topic 958),”_ to require a recipient not-for-profit entity to recognize all services received from personnel of an affiliate that directly benefit the recipient not-for-profit entity. Those services should be measured at the cost recognized by the affiliate for the personnel providing those services. The amendments in this Update are effective prospectively for fiscal years beginning after 15 June 2014, and interim and annual periods thereafter. ADB is currently assessing the impact of this ASU on PEF’s financial statements. 

In April 2013, the FASB issued ASU 2013-07, _“Presentation of Financial Statements (Topic 205) – Liquidation Basis of Accounting,”_ to require an entity to prepare its financial statements using the liquidation basis of accounting when liquidation is imminent. The amendments are effective for entities that determine liquidation is imminent during annual reporting periods beginning after 15 December 2013, and interim reporting periods therein. This ASU is not expected to impact 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. 

## **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. 

All investments held as of 31 December 2013 and 2012 were in time deposits. 

187 

**PEF-4** 

## continued 

The currency composition of the investment portfolio as of 31 December 2013 and 2012 expressed in US dollars was as follows: 

|($thousand)||
|---|---|
|**Currency**<br>Pakistan rupee<br>US dollar<br>**Total**|**2013**<br>**2012**<br>4,257<br>$ 4,546<br>$ 13,203<br>13,182<br>**17,460**<br>**$**<br>**17,728**<br>**$**|



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 1.80% (1.58% – 2012). 

## _Fair Value Disclosure_ 

The fair value of INVESTMENTS as of 31 December 2013 and 2012 was as follows: 

($ thousand) 

|Investments<br>Time deposits<br>($thousand)|**31 December 2013**<br>17,460<br>$|**Fair Value Measurements**|**Fair Value Measurements**|
|---|---|---|---|
|||**Level 1**<br>–<br>$|**Level 2**<br>**Level 3**<br>17,460<br>$ –<br>$|
|Investments<br>Time deposits|**31 December 2012**<br>17,728<br>$|**Fair Value Measurements**||
|||**Level 1**<br>–<br>$|**Level 2**<br>**Level 3**<br>17,728<br>$ –<br>$|



ADB maintains documented processes and internal controls to value investment securities. Time deposits are reported at cost, which approximates fair value. 

## **NOTE D—RELATED PARTY TRANSACTIONS** 

The OCR and special funds resources are at all times used, committed, and invested entirely separately 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 2013, there was no payable to OCR ($8,000 – 2012). 

## **NOTE E—UNDISBURSED COMMITMENTS** 

Undisbursed commitments are denominated in US dollars and represent effective grants not yet disbursed and unliquidated. During 2013, $13,930,000 undisbursed amounts were written back from financially completed and/or cancelled grant (nil – 2012). 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. 

188 

**PEF-4** 

continued 

## **NOTE F—UNCOMMITTED BALANCES** 

Uncommitted balances comprise amounts which have not been committed by ADB as of 31 December 2013 and 2012. 

## **NOTE G—OTHER FAIR VALUE DISCLOSURES** 

As of 31 December 2013 and 2012, 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 is considered to approximate fair value. 

## **NOTE H—SUBSEQUENT EVENTS** 

ADB has evaluated subsequent events after 31 December 2013 through 12 March 2014, 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 2013. 

189 

## **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 2013. 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 (1992)._ Based on that assessment, management believes that as of 31 December 2013, ADB's internal control over financial reporting is effective based upon the criteria established in _Internal Control – Integrated Framework (1992)._ 

Takehiko Nakao President 

Thierry de Longuemar 

Vice-President (Finance and Risk Management) 

Simon T. Bradbury Controller 

12 March 2014 

190 

Deloitte & Touche LLP Unique Entity No. T08LL0721A 6 Shenton Way #32-00 OUE Downtown 2 Singapore 068809

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

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, 2013, based on the criteria established in Internal Control — Integrated Framework (1992) 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.

Deloitte & Touche LLP (Unique Entity No. T08LL0721A) is an accounting limited liability partnership registered in Singapore under the Limited Liability Partnerships Act (Chapter 163A).

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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, 2013, is fairly stated, in all material respects, based on the criteria established in Internal Control — Integrated Framework (1992) 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, 2013 and 2012 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 12, 2014 expressed an unqualified opinion on those financial statements.

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Public Accountants and Chartered Accountants Singapore

March 12, 2014

192

Deloitte & Touche LLP Unique Entity No. T08LL0721A 6 Shenton Way #32-00 OUE Downtown 2 Singapore 068809 

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

## **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, 2013 and 2012, 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. 

Deloitte & Touche LLP (Unique Entity No. T08LL0721A) is an accounting limited liability partnership registered in Singapore under the Limited Liability Partnerships Act (Chapter 163A). 

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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 – Regional Cooperation and Integration Fund as of December 31, 2013 and 2012, 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, 2013, based on the criteria established in Internal Control — _Integrated Framework (1992)_ issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated March 12, 2014 expressed an unqualified opinion on management’s assertion that ADB maintained effective internal control over financial reporting. 

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Public Accountants and Chartered Accountants Singapore 

March 12, 2014 

194 

**RCIF-1** 

## **ASIAN DEVELOPMENT BANK—REGIONAL COOPERATION AND INTEGRATION FUND** 

## **STATEMENT OF FINANCIAL POSITION 31 December 2013 and 2012** 

Expressed in Thousands of US Dollars 

|**ASSETS**<br>DUE FROM BANKS<br>INVESTMENTS (Notes C and G)<br>Time deposits<br>ACCRUED REVENUE<br>ADVANCES FOR GRANTS AND OTHER ASSETS (Note D)|**2013**<br>266<br>$ 17,546<br>1<br>815|**2012**|
|---|---|---|
|||251<br>$ 17,619<br>1<br>1,798|
|**TOTAL**|**18,628**<br>**$**|**19,669**<br>**$**|
|**LIABILITIES AND UNCOMMITTED BALANCES**<br>ACCOUNTS PAYABLE AND OTHER LIABILITIES (Note D)<br>UNDISBURSED COMMITMENTS (Notes E and G)<br>TOTAL LIABILITIES<br>UNCOMMITTED BALANCES (RCIF-2) (Note F), represented by:<br>Unrestricted net assets|135<br>$ 13,373<br>13,508<br>5,120|61<br>$ 17,957|
|||18,018<br>1,651|
|**TOTAL**|**18,628**<br>**$**|**19,669**<br>**$**|



The accompanying notes are an integral part of these financial statements (RCIF-4). 

195 

**RCIF-2** 

## **ASIAN DEVELOPMENT BANK—REGIONAL COOPERATION AND INTEGRATION FUND** 

## **STATEMENT OF ACTIVITIES AND CHANGES IN NET ASSETS For the Years Ended 31 December 2013 and 2012** 

Expressed in Thousands of US Dollars 

|**CHANGES IN UNRESTRICTED NET ASSETS**<br>CONTRIBUTIONS (Note F)<br>REVENUE<br>From investments (Note C)<br>From other sources<br>Total<br>EXPENSES<br>Technical assistance—net (Note E)<br>Administrative and financial expenses (Note D)<br>Total<br>CONTRIBUTIONS AND REVENUE IN EXCESS OF<br>(LESS THAN) EXPENSES<br>EXCHANGE LOSSES—net<br>INCREASE (DECREASE) IN NET ASSETS<br>NET ASSETS AT BEGINNING OF YEAR|**2013**<br>6,000<br>$ 26<br>2<br>6,028<br>2,201<br>355<br>2,556<br>3,472<br>(3)<br>3,469<br>1,651|**2012**|
|---|---|---|
|||–<br>$ 36<br>0|
|||36|
|||2,103<br>421|
|||2,524|
|||(2,488)<br>(4)|
|||(2,492)<br>4,143|
|**NET ASSETS AT END OF YEAR**|**5,120**<br>**$**|**1,651**<br>**$**|



0 = Less than $500. 

The accompanying notes are an integral part of these financial statements (RCIF-4). 

196 

**RCIF-3** 

## **ASIAN DEVELOPMENT BANK—REGIONAL COOPERATION AND INTEGRATION FUND** 

## **STATEMENT OF CASH FLOWS For the Years Ended 31 December 2013 and 2012** 

Expressed in Thousands of US Dollars 

|CASH FLOWS FROM OPERATING ACTIVITIES<br>Contributions received<br>Interest on investments received<br>Cash received from other sources<br>Technical assistance disbursed<br>Administrative and financial expenses paid<br>Net Cash Used in Operating Activities<br>CASH FLOWS FROM INVESTING ACTIVITIES<br>Maturities of investments<br>Purchases of investments<br>Net Cash Provided by Investing Activities<br>Net Increase in Due From Banks<br>Due from Banks at Beginning of Year<br>Due from Banks at End of Year<br>RECONCILIATION OF INCREASE (DECREASE) IN NET ASSETS<br>TO NET CASH USED IN OPERATING ACTIVITIES:<br>Increase (Decrease) in net assets (RCIF-2)<br>Adjustments to reconcile increase (decrease) in net assets<br>to net cash used in operating activities:<br>Change in advances for grants and other assets<br>Change in accounts payable and other liabilities<br>Change in undisbursed commitments<br>Exchange losses—net<br>Net Cash Used in Operating Activities|**2013**<br>6,000<br>$ 27<br>2<br>(5,726)<br>(361)<br>(58)<br>824,161<br>(824,088)<br>73<br>15<br>251<br>266<br>$ 3,469<br>$ 979<br>75<br>(4,584)<br>3<br>(58)<br>$|**2012**|
|---|---|---|
|||–<br>$ 36<br>0<br>(7,985)<br>(443)|
|||(8,392)|
|||1,028,408<br>(1,019,944)|
|||8,464|
|||72<br>179|
|||251<br>$|
|||(2,492)<br>$ 147<br>(24)<br>(6,025)<br>2|
|||(8,392)<br>$|



0 = Less than $500. 

The accompanying notes are an integral part of these financial statements (RCIF-4). 

197 

**RCIF-4** 

**ASIAN DEVELOPMENT BANK—REGIONAL COOPERATION AND INTEGRATION FUND NOTES TO FINANCIAL STATEMENTS 31 December 2013 and 2012** 

## **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 the 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 US 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), Asia Pacific Disaster Response Fund (APDRF), and Financial Sector Development Partnership Special Fund (FSDPSF). 

198 

**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 the 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. 

## _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. These are included in ADVANCES FOR GRANTS AND OTHER ASSETS. 

## _Fair Value of Financial Instruments_ 

ASC 820, “Fair Value Measurement” 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). 

199 

**RCIF-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 April 2013, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2013-06, _“Not-for-Profit Entities (Topic 958),”_ to require a recipient not-for-profit entity to recognize all services received from personnel of an affiliate that directly benefit the recipient not-for-profit entity. Those services should be measured at the cost recognized by the affiliate for the personnel providing those services. The amendments in this Update are effective prospectively for fiscal years beginning after 15 June 2014, and interim and annual periods thereafter. ADB is currently assessing the impact of this ASU on RCIF’s financial statements. 

In April 2013, the FASB issued ASU 2013-07, _“Presentation of Financial Statements (Topic 205) – Liquidation Basis of Accounting,”_ to require an entity to prepare its financial statements using the liquidation basis of accounting when liquidation is imminent. The amendments are effective for entities that determine liquidation is imminent during annual reporting periods beginning after 15 December 2013, and interim reporting periods therein. This ASU is not expected to impact 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. 

All investments held as of 31 December 2013 and 2012 were in time deposits. 

200 

**RCIF-4** 

## continued 

The annualized rate of return on the average investments held during the period ended 31 December 2013, based on the portfolio held at the beginning and end of each month, was 0.16% (0.18% – 2012). 

## _Fair Value Disclosure_ 

The fair value of INVESTMENTS as of 31 December 2013 and 2012 was as follows: 

($ thousand) 

|Investments<br>Time deposits|**31 December 2013**<br>17,546<br>$|**Fair Value Measurements**|**Fair Value Measurements**|
|---|---|---|---|
|||**Level 1**<br>–<br>$|**Level 2**<br>**Level 3**<br>17,546<br>$ –<br>$|
|||||
|($thousand)||||
|Investments<br>Time deposits|**31 December 2012**<br>17,619<br>$|**Fair Value Measurements**||
|||**Level 1**<br>–<br>$|**Level 2**<br>**Level 3**<br>17,619<br>$ –<br>$|



ADB maintains documented processes and internal controls to value investment securities. Time deposits are reported at cost, which approximates fair value. 

## **NOTE D—RELATED PARTY TRANSACTIONS** 

The OCR and special funds resources are at all times used, committed, and invested entirely separately 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: 

|($thousand)||
|---|---|
|**Receivable from:**<br>Technical Assistance Special Fund<br>Japan Special Fund<br>Climate Change Fund<br>Total<br>**Payable to:**<br>Ordinary capital resources<br>Technical Assistance Special Fund<br>Japan Special Fund<br>Agency Trust Funds—net<br>Total|**2013**<br>**2012**<br>–<br>$ 53<br>$ –<br>7<br>–<br>2<br>–<br>$ 62<br>$ 29<br>$ 53<br>$ 9<br>–<br>2<br>–<br>24<br>–<br>64<br>$ 53<br>$|



201 

**RCIF-4** 

continued 

## **NOTE E—UNDISBURSED COMMITMENTS** 

Undisbursed commitments are denominated in US dollars and represent effective technical assistance and grants not yet disbursed and unliquidated. During 2013, $819,000 ($322,000 – 2012) 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—CONTRIBUTIONS AND UNCOMMITTED BALANCES** 

In May 2013, the Board of Governors approved the transfer of $6,000,000 (nil – 2012) to the RCIF as part of OCR’s 2012 net income allocation. 

Uncommitted balances comprise amounts which have not been committed by ADB as of 31 December 2013 and 2012. 

## **NOTE G—OTHER FAIR VALUE DISCLOSURES** 

As of 31 December 2013 and 2012, 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 is considered to approximate fair value. 

## **NOTE H—SUBSEQUENT EVENTS** 

ADB has evaluated subsequent events after 31 December 2013 through 12 March 2014, the date these Financial Statements are available for issuance. On 6 March 2014, the Government of Japan committed its 1st contribution to the RCIF amounting to ¥246,000,000 ($2,405,000 equivalent). 

202 

## **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 2013. 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 (1992)._ Based on that assessment, management believes that as of 31 December 2013, ADB's internal control over financial reporting is effective based upon the criteria established in _Internal Control – Integrated Framework (1992)._ 

Takehiko Nakao President 

Thierry de Longuemar 

Vice-President (Finance and Risk Management) 

Simon T. Bradbury Controller 

12 March 2014 

203 

Deloitte & Touche LLP Unique Entity No. T08LL0721A 6 Shenton Way #32-00 OUE Downtown 2 Singapore 068809

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

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, 2013, based on the criteria established in Internal Control — Integrated Framework (1992) 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.

Deloitte & Touche LLP (Unique Entity No. T08LL0721A) is an accounting limited liability partnership registered in Singapore under the Limited Liability Partnerships Act (Chapter 163A).

204

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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, 2013, is fairly stated, in all material respects, based on the criteria established in Internal Control — Integrated Framework (1992) 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, 2013 and 2012 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 12, 2014 expressed an unqualified opinion on those financial statements.

==> picture [216 x 28] intentionally omitted <==

Public Accountants and Chartered Accountants Singapore

March 12, 2014

205

Deloitte & Touche LLP Unique Entity No. T08LL0721A 6 Shenton Way #32-00 OUE Downtown 2 Singapore 068809 

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

## **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, 2013 and 2012, 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. 

Deloitte & Touche LLP (Unique Entity No. T08LL0721A) is an accounting limited liability partnership registered in Singapore under the Limited Liability Partnerships Act (Chapter 163A). 

206 

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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, 2013 and 2012, 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, 2013, based on the criteria established in Internal Control — _Integrated Framework (1992)_ issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated March 12, 2014 expressed an unqualified opinion on management’s assertion that ADB maintained effective internal control over financial reporting. 

**==> picture [216 x 28] intentionally omitted <==**

Public Accountants and Chartered Accountants Singapore 

March 12, 2014 

207 

**CCF-1** 

## **ASIAN DEVELOPMENT BANK—CLIMATE CHANGE FUND** 

## **STATEMENT OF FINANCIAL POSITION 31 December 2013 and 2012** 

Expressed in Thousands of US Dollars 

|**ASSETS**<br>DUE FROM BANKS<br>INVESTMENTS (Notes C and G)<br>Time deposits<br>ACCRUED REVENUE<br>ADVANCES FOR GRANTS AND OTHER ASSETS|**2013**<br>1,676<br>$ 36,943<br>2<br>1,091|**2012**|
|---|---|---|
|||276<br>$ 32,685<br>2<br>1,496|
|**TOTAL**|**39,712**<br>**$**|**34,459**<br>**$**|
|**LIABILITIES AND UNCOMMITTED BALANCES**<br>ACCOUNTS PAYABLE AND OTHER LIABILITIES (Note D)<br>UNDISBURSED COMMITMENTS (Notes E and G)<br>TOTAL LIABILITIES<br>UNCOMMITTED BALANCES (CCF-2) (Note F), represented by:<br>Unrestricted net assets|49<br>$ 26,090<br>26,139<br>13,573|69<br>$ 26,506|
|||26,575<br>7,884|
|**TOTAL**|**39,712**<br>**$**|**34,459**<br>**$**|



The accompanying notes are an integral part of these financial statements (CCF-4). 

208 

**CCF-2** 

## **ASIAN DEVELOPMENT BANK—CLIMATE CHANGE FUND STATEMENT OF ACTIVITIES AND CHANGES IN NET ASSETS For the Years Ended 31 December 2013 and 2012** 

Expressed in Thousands of US Dollars 

|**CHANGES IN UNRESTRICTED NET ASSETS**<br>CONTRIBUTIONS (Note F)<br>REVENUE FROM INVESTMENTS (Note C)<br>Total<br>EXPENSES<br>Technical assistance and grants—net (Note E)<br>Administrative and financial expenses (Note D)<br>Total<br>CONTRIBUTION AND REVENUE IN EXCESS OF<br>(LESS THAN) EXPENSES<br>EXCHANGE GAINS—net<br>INCREASE (DECREASE) IN NET ASSETS<br>NET ASSETS AT BEGINNING OF YEAR|**2013**<br>9,000<br>$ 58<br>9,058<br>2,945<br>429<br>3,374<br>5,684<br>5<br>5,689<br>7,884|**2012**|
|---|---|---|
|||–<br>$ 61|
|||61|
|||6,016<br>412|
|||6,428|
|||(6,367)<br>9|
|||(6,358)<br>14,242|
|**NET ASSETS AT END OF YEAR**|**13,573**<br>**$**|**7,884**<br>**$**|



The accompanying notes are an integral part of these financial statements (CCF-4). 

209 

**CCF-3** 

## **ASIAN DEVELOPMENT BANK—CLIMATE CHANGE FUND STATEMENT OF CASH FLOWS For the Years Ended 31 December 2013 and 2012** 

Expressed in Thousands of US Dollars 

|CASH FLOWS FROM OPERATING ACTIVITIES<br>Contribution received<br>Interest on investments received<br>Technical assistance and grants disbursed<br>Administrative and financial expenses paid<br>Net Cash Provided by (Used in) Operating Activities<br>CASH FLOWS FROM INVESTING ACTIVITIES<br>Maturities of investments<br>Purchases of investments<br>Net Cash (Used in) Provided by Investing Activities<br>Net Increase in Due From Banks<br>Due from Banks at Beginning of Year<br>Due from Banks at End of Year<br>RECONCILIATION OF INCREASE (DECREASE) IN NET ASSETS<br>TO NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES:<br>Increase (Decrease) in net assets (CCF-2)<br>Adjustments to reconcile increase (decrease) in net assets<br>to net cash provided by (used in) operating activities:<br>Change in advances for grants and other assets<br>Change in accounts payable and other liabilities<br>Change in undisbursed commitments<br>Exchange losses (gains)—net<br>Net Cash Provided by (Used in) Operating Activities|**2013**<br>9,000<br>$ 59<br>(2,953)<br>(447)<br>5,659<br>1,747,101<br>(1,751,360)<br>(4,259)<br>1,400<br>276<br>1,676<br>$ 5,689<br>$ 405<br>(20)<br>(416)<br>1<br>5,659<br>$|**2012**|
|---|---|---|
|||–<br>$ 60<br>(4,670)<br>(317)|
|||(4,927)|
|||1,726,721<br>(1,721,682)|
|||5,039|
|||112<br>164|
|||276<br>$|
|||(6,358)<br>$ (167)<br>54<br>1,545<br>(1)|
|||(4,927)<br>$|



The accompanying notes are an integral part of these financial statements (CCF-4). 

210 

**CCF-4** 

**ASIAN DEVELOPMENT BANK—CLIMATE CHANGE FUND NOTES TO FINANCIAL STATEMENTS 31 December 2013 and 2012** 

## **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 US 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), Asia Pacific Disaster Response Fund (APDRF), and Financial Sector Development Partnership Special Fund (FSDPSF). 

211 

**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 the 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. These are included in ADVANCES FOR GRANTS AND OTHER ASSETS. 

## _Fair Value of Financial Instruments_ 

ASC 820, “Fair Value Measurement” 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). 

212 

**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 April 2013, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2013-06, _“Not-for-Profit Entities (Topic 958),”_ to require a recipient not-for-profit entity to recognize all services received from personnel of an affiliate that directly benefit the recipient not-for-profit entity. Those services should be measured at the cost recognized by the affiliate for the personnel providing those services. The amendments in this Update are effective prospectively for fiscal years beginning after 15 June 2014, and interim and annual periods thereafter. ADB is currently assessing the impact of this ASU on CCF’s financial statements. 

In April 2013, the FASB issued ASU 2013-07, _“Presentation of Financial Statements (Topic 205) – Liquidation Basis of Accounting,”_ to require an entity to prepare its financial statements using the liquidation basis of accounting when liquidation is imminent. The amendments are effective for entities that determine liquidation is imminent during annual reporting periods beginning after 15 December 2013, and interim reporting periods therein. This ASU is not expected to impact 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. 

All investments held as of 31 December 2013 and 2012 were in time deposits. 

213 

**CCF-4** 

## continued 

The annualized rate of return on the average investments held during the period ended 31 December 2013, based on the portfolio held at the beginning and end of each month, was 0.17 % (0.18% – 2012). 

## _Fair Value Disclosure_ 

The fair value of INVESTMENTS as of 31 December 2013 and 2012 was as follows: 

($ thousand) 

|Investments<br>Time deposits<br>($thousand)|**31 December 2013**<br>36,943<br>$|**Fair Value Measurements**|**Fair Value Measurements**|
|---|---|---|---|
|||**Level 1**<br>–<br>$|**Level 2**<br>**Level 3**<br>36,943<br>$ –<br>$|
|Investments<br>Time deposits|**31 December 2012**<br>32,685<br>$|**Fair Value Measurements**||
|||**Level 1**<br>–<br>$|**Level 2**<br>**Level 3**<br>32,685<br>$ –<br>$|



ADB maintains documented processes and internal controls to value investment securities. Time deposits are reported at cost, which approximates fair value. 

## **NOTE D—RELATED PARTY TRANSACTIONS** 

The OCR and special funds resources are at all times used, committed, and invested entirely separately 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 ACCOUNTS PAYABLE AND OTHER LIABILITIES are as follows: 

($ thousand) 

|**Payable to:**<br>Ordinary capital resources<br>Technical Assistance Special Fund<br>Regional Cooperation and Integration Fund<br>Total|**2013**<br>**2012**<br>25<br>$ 27<br>$ 9<br>33<br>–<br>2<br>34<br>$ 62<br>$|
|---|---|



214 

**CCF-4** 

continued 

## **NOTE E—UNDISBURSED COMMITMENTS** 

Undisbursed commitments are denominated in US dollars and represent TA not yet disbursed and unliquidated. During 2013, $377,000 ($1,006,000 – 2012) 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** 

In May 2013, the Board of Governors approved the transfer of $9,000,000 (nil – 2012) to the CCF as part of OCR’s 2012 net income allocation. 

Uncommitted balances comprise amounts which have not been committed by ADB as of 31 December 2013 and 2012. 

## **NOTE G—OTHER FAIR VALUE DISCLOSURES** 

As of 31 December 2013 and 2012, 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 is considered to approximate fair value. 

## **NOTE H—SUBSEQUENT EVENTS** 

ADB has evaluated subsequent events after 31 December 2013 through 12 March 2014, 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 2013. 

215 

## **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 2013. 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 (1992)._ Based on that assessment, management believes that as of 31 December 2013, ADB's internal control over financial reporting is effective based upon the criteria established in _Internal Control – Integrated Framework (1992)._ 

Takehiko Nakao President 

Thierry de Longuemar 

Vice-President (Finance and Risk Management) 

Simon T. Bradbury Controller 

12 March 2014 

216 

Deloitte & Touche LLP Unique Entity No. T08LL0721A 6 Shenton Way #32-00 OUE Downtown 2 Singapore 068809

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

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, 2013, based on the criteria established in Internal Control — Integrated Framework (1992) 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.

Deloitte & Touche LLP (Unique Entity No. T08LL0721A) is an accounting limited liability partnership registered in Singapore under the Limited Liability Partnerships Act (Chapter 163A).

217

==> picture [89 x 18] intentionally omitted <==

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, 2013, is fairly stated, in all material respects, based on the criteria established in Internal Control — Integrated Framework (1992) 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, 2013 and 2012 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 12, 2014 expressed an unqualified opinion on those financial statements.

==> picture [216 x 28] intentionally omitted <==

Public Accountants and Chartered Accountants Singapore

March 12, 2014

218

==> picture [130 x 25] intentionally omitted <==

Deloitte & Touche LLP Unique Entity No. T08LL0721A 6 Shenton Way #32-00 OUE Downtown 2 Singapore 068809

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

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, 2013 and 2012, 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.

Deloitte & Touche LLP (Unique Entity No. T08LL0721A) is an accounting limited liability partnership registered in Singapore under the Limited Liability Partnerships Act (Chapter 163A).

219

==> picture [89 x 18] intentionally omitted <==

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, 2013 and 2012, 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, 2013, based on the criteria established in Internal Control — Integrated Framework (1992) issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated March 12, 2014 expressed an unqualified opinion on management’s assertion that ADB maintained effective internal control over financial reporting.

==> picture [216 x 28] intentionally omitted <==

Public Accountants and Chartered Accountants Singapore

March 12, 2014

220

APDRF-1

ASIAN DEVELOPMENT BANK—ASIA PACIFIC DISASTER RESPONSE FUND

STATEMENT OF FINANCIAL POSITION 31 December 2013 and 2012

Expressed in Thousands of US Dollars

ASSETS DUE FROM BANKS INVESTMENTS (Notes C and G) Time deposits ADVANCES FOR GRANTS	2013 4,671 $ – 9,500	2012
		3,180 $ 7,171 11,101
TOTAL	14,171 $	21,452 $
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	14 $ 9,500 9,514 4,657	74 $ 11,124
		11,198 10,254
TOTAL	14,171 $	21,452 $

The accompanying notes are an integral part of these financial statements (APDRF-4).

221

APDRF-2

ASIAN DEVELOPMENT BANK—ASIA PACIFIC DISASTER RESPONSE FUND

STATEMENT OF ACTIVITIES AND CHANGES IN NET ASSETS For the Years Ended 31 December 2013 and 2012

Expressed in Thousands of US 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—net DECREASE IN NET ASSETS NET ASSETS AT BEGINNING OF YEAR	2013 12 $ 3 15 5,457 155 5,612 (5,597) – (5,597) 10,254	2012
		9 $ 1
		10
		2,000 251
		2,251
		(2,241) 135
		(2,106) 12,360
NET ASSETS AT END OF YEAR	4,657 $	10,254 $

The accompanying notes are an integral part of these financial statements (APDRF-4).

222

APDRF-3

ASIAN DEVELOPMENT BANK—ASIA PACIFIC DISASTER RESPONSE FUND

STATEMENT OF CASH FLOWS For the Years Ended 31 December 2013 and 2012

Expressed in Thousands of US Dollars

CASH FLOWS FROM OPERATING ACTIVITIES Interest on investments received Cash received from other sources Refund of advances under grants 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 (APDRF-2) Adjustments to reconcile decrease in net assets to net cash used in operating activities: Change in advances for grants Change in accounts payable and other liabilities Change in undisbursed commitments Exchange gains—net Net Cash Used in Operating Activities	2013 12 $ 3 1,350 (6,830) (215) (5,680) 376,542 (369,371) 7,171 1,491 3,180 4,671 $ (5,597) $ 1,601 (60) (1,624) – (5,680) $	2012
		9 $ 1 – (4,979) (191)
		(5,160)
		269,501 (265,510)
		3,991
		(1,169) 4,349
		3,180 $
		(2,106) $ 6,897 60 (9,876) (135)
		(5,160) $

The accompanying notes are an integral part of these financial statements (APDRF-4).

223

APDRF-4

ASIAN DEVELOPMENT BANK—ASIA PACIFIC DISASTER RESPONSE FUND NOTES TO FINANCIAL STATEMENTS 31 December 2013 and 2012

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 US 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), Asia Pacific Disaster Response Fund (APDRF), and Financial Sector Development Partnership Special Fund (FSDPSF).

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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 the 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. These are included in ADVANCES FOR GRANTS.

Fair Value of Financial Instruments

ASC 820, “Fair Value Measurement” 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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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 2013, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2013-06, “Not-for-Profit Entities (Topic 958),” to require a recipient not-for-profit entity to recognize all services received from personnel of an affiliate that directly benefit the recipient not-for-profit entity. Those services should be measured at the cost recognized by the affiliate for the personnel providing those services. The amendments in this Update are effective prospectively for fiscal years beginning after 15 June 2014, and interim and annual periods thereafter. ADB is currently assessing the impact of this ASU on APDRF’s financial statements.

In April 2013, the FASB issued ASU 2013-07, “Presentation of Financial Statements (Topic 205) – Liquidation Basis of Accounting,” to require an entity to prepare its financial statements using the liquidation basis of accounting when liquidation is imminent. The amendments are effective for entities that determine liquidation is imminent during annual reporting periods beginning after 15 December 2013, and interim reporting periods therein. This ASU is not expected to impact 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.

All investments held as of 31 December 2012 were in time deposits. As of 31 December 2013, all time deposit placements have matured.

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APDRF-4

continued

The annualized rate of return on the average investments held during the period ended 31 December 2013, based on the portfolio held at the beginning and end of each month, was 0.17% (0.17% – 2012).

Fair Value Disclosure

The fair value of INVESTMENTS as of 31 December 2012 was as follows:

($thousand)
Investments Time deposits	31 December 2012 7,171 $	Fair Value Measurements
		Level 1 – $	Level 2 Level 3 7,171 $ – $

ADB maintains documented processes and internal controls to value investment securities. Time deposits are reported at cost, which approximates fair value.

NOTE D—RELATED PARTY TRANSACTIONS

The OCR and special funds resources are at all times used, committed, and invested entirely separately 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 2013, there was no payable to OCR ($67,000 – 2012).

NOTE E—UNDISBURSED COMMITMENTS

Undisbursed commitments are denominated in US dollars and represent grants not yet disbursed and unliquidated. During 2013, $1,500,000 undisbursed amounts were written back from financially completed and/or cancelled grant (nil – 2012). 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 2013 and 2012.

Uncommitted balances comprise amounts which have not been committed by ADB as of 31 December 2013 and 2012.

NOTE G—OTHER FAIR VALUE DISCLOSURES

As of 31 December 2013 and 2012, 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 is considered to approximate fair value.

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continued

NOTE H—SUBSEQUENT EVENTS

ADB has evaluated subsequent events after 31 December 2013 through 12 March 2014, 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 2013.

228

FINANCIAL SECTOR DEVELOPMENT PARTNERSHIP 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 2013. 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 (1992). Based on that assessment, management believes that as of 31 December 2013, ADB's internal control over financial reporting is effective based upon the criteria established in Internal Control – Integrated Framework (1992).

Takehiko Nakao President

Thierry de Longuemar

Vice-President (Finance and Risk Management)

Simon T. Bradbury Controller

12 March 2014

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Deloitte & Touche LLP Unique Entity No. T08LL0721A 6 Shenton Way #32-00 OUE Downtown 2 Singapore 068809

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

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, 2013, based on the criteria established in Internal Control — Integrated Framework (1992) 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.

Deloitte & Touche LLP (Unique Entity No. T08LL0721A) is an accounting limited liability partnership registered in Singapore under the Limited Liability Partnerships Act (Chapter 163A).

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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, 2013, is fairly stated, in all material respects, based on the criteria established in Internal Control — Integrated Framework (1992) 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”) – Financial Sector Development Partnership Special Fund as of December 31, 2013 and the related statements of activities and changes in net assets, and cash flows for the period from January 31, 2013 (establishment of the Fund) to December 31, 2013 and the related notes to the financial statements. Our report dated March 12, 2014 expressed an unqualified opinion on those financial statements.

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Public Accountants and Chartered Accountants Singapore

March 12, 2014

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Deloitte & Touche LLP Unique Entity No. T08LL0721A 6 Shenton Way #32-00 OUE Downtown 2 Singapore 068809

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

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”) – Financial Sector Development Partnership Special Fund which comprise the statement of financial position as of December 31, 2013, and the related statements of activities and changes in net assets, and cash flows for the period from January 31, 2013 (establishment of the Fund) to December 31, 2013, 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.

Deloitte & Touche LLP (Unique Entity No. T08LL0721A) is an accounting limited liability partnership registered in Singapore under the Limited Liability Partnerships Act (Chapter 163A).

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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 – Financial Sector Development Partnership Special Fund as of December 31, 2013, and the results of its operations and its cash flows for the period from January 31, 2013 (establishment of the Fund) to December 31, 2013 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, 2013, based on the criteria established in Internal Control — Integrated Framework (1992) issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated March 12, 2014 expressed an unqualified opinion on management’s assertion that ADB maintained effective internal control over financial reporting.

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Public Accountants and Chartered Accountants Singapore

March 12, 2014

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FSDPSF-1

STATEMENT OF FINANCIAL POSITION 31 December 2013 Expressed in Thousands of US Dollars ASIAN DEVELOPMENT BANK—FINANCIAL SECTOR DEVELOPMENT PARTNERSHIP SPECIAL FUND	STATEMENT OF FINANCIAL POSITION 31 December 2013 Expressed in Thousands of US Dollars ASIAN DEVELOPMENT BANK—FINANCIAL SECTOR DEVELOPMENT PARTNERSHIP SPECIAL FUND
ASSETS DUE FROM BANKS INVESTMENTS (Notes C and G) Time deposits DUE FROM CONTRIBUTORS (Note F)	2013
	302 $ 4,800 2,070
TOTAL	7,172 $
LIABILITIES AND UNCOMMITTED BALANCES ACCOUNTS PAYABLE AND OTHER LIABILITIES (Note D) UNCOMMITTED BALANCES (FSDPSF-2) (Note F), represented by: Unrestricted net assets	9 $ 7,163
TOTAL	7,172 $

The accompanying notes are an integral part of these financial statements (FSDPSF-4).

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FSDPSF-2

ASIAN DEVELOPMENT BANK—FINANCIAL SECTOR DEVELOPMENT PARTNERSHIP SPECIAL FUND STATEMENT OF ACTIVITIES AND CHANGES IN NET ASSETS For the Period 31 January to 31 December 2013

Expressed in Thousands of US Dollars

CHANGES IN UNRESTRICTED NET ASSETS CONTRIBUTIONS (Note F) REVENUE FROM OTHER SOURCES Total EXPENSES Administrative and financial expenses (Note D) CONTRIBUTION AND REVENUE IN EXCESS OF EXPENSES EXCHANGE GAINS—net INCREASE IN NET ASSETS NET ASSETS AT BEGINNING OF YEAR	2013
	7,137 $ 2
	7,139
	9
	7,130 33
	7,163 –
NET ASSETS AT END OF YEAR	7,163 $

The accompanying notes are an integral part of these financial statements (FSDPSF-4).

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FSDPSF-3

ASIAN DEVELOPMENT BANK—FINANCIAL SECTOR DEVELOPMENT PARTNERSHIP SPECIAL FUND

STATEMENT OF CASH FLOWS

For the Period 31 January to 31 December 2013

Expressed in Thousands of US Dollars

CASH FLOWS FROM OPERATING ACTIVITIES Contributions received Cash received from other sources Net Cash Provided by Operating Activities CASH FLOWS FROM INVESTING ACTIVITIES Purchases of investments Net Cash Used in Investing Activities Net Increase 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 OPERATING ACTIVITIES: Increase in net assets (FSDPSF-2) Adjustments to reconcile increase in net assets to net cash provided by operating activities: Change in accounts payable and other liabilities Change in due from contributors Net Cash Provided by Operating Activities	2013
	5,100 $ 2
	5,102
	(4,800)
	(4,800)
	302 –
	302 $
	7,163 $ 9 (2,070)
	5,102 $

The accompanying notes are an integral part of these financial statements (FSDPSF-4).

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FSDPSF-4

ASIAN DEVELOPMENT BANK—FINANCIAL SECTOR DEVELOPMENT PARTNERSHIP SPECIAL FUND NOTES TO FINANCIAL STATEMENTS For the Period 31 January to 31 December 2013

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 Financial Sector Development Partnership Special Fund (FSDPSF) was approved by the Board of Directors and established on 31 January 2013 to strengthen regional, subregional, and national financial systems in Asia and the Pacific. The FSDPSF will provide financial assistance through grants for components of investments projects and TA projects.

FSDPSF’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 FSDPSF 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. The financial statements are for the first period of FSDPSF’s activities and consequently do not include prior year comparative amounts.

FSDPSF reports donors’ contributions of cash and other assets as unrestricted assets as these are made available to FSDPSF without conditions other than for the purpose of pursuing its objectives.

Functional and Reporting Currency

The US dollar is the functional and reporting currency, representing the currency of the primary economic operating environment of FSDPSF.

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), Asia Pacific Disaster Response Fund (APDRF), and Financial Sector Development Partnership Special Fund (FSDPSF).

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FSDPSF-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 the 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 FSDPSF 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, “Fair Value Measurement” 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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FSDPSF-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 April 2013, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2013-06, “Not-for-Profit Entities (Topic 958),” to require a recipient not-for-profit entity to recognize all services received from personnel of an affiliate that directly benefit the recipient not-for-profit entity. Those services should be measured at the cost recognized by the affiliate for the personnel providing those services. The amendments in this Update are effective prospectively for fiscal years beginning after 15 June 2014, and interim and annual periods thereafter. ADB is currently assessing the impact of this ASU on FSDPSF’s financial statements.

In April 2013, the FASB issued ASU 2013-07, “Presentation of Financial Statements (Topic 205) – Liquidation Basis of Accounting,” to require an entity to prepare its financial statements using the liquidation basis of accounting when liquidation is imminent. The amendments are effective for entities that determine liquidation is imminent during annual reporting periods beginning after 15 December 2013, and interim reporting periods therein. This ASU is not expected to impact FSDPSF’s financial statements.

Statement of Cash Flows

For the purposes of the Statement of Cash Flows, FSDPSF 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.

All investments held as of 31 December 2013 were in time deposits.

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FSDPSF-4

continued

The annualized rate of return on the average investments held during the period ended 31 December 2013, based on the portfolio held at the beginning and end of each month, was 0.002%

Fair Value Disclosure

The fair value of INVESTMENTS as of 31 December 2013 was as follows:

($thousand)
Investments Time deposits	31 December 2013 4,800 $	Fair Value Measurements
		Level 1 – $	Level 2 Level 3 4,800 $ – $

ADB maintains documented processes and internal controls to value investment securities. Time deposits are reported at cost, which approximates fair value.

NOTE D—RELATED PARTY TRANSACTIONS

The ordinary capital resources (OCR) and special funds resources are at all times used, committed, and invested entirely separately from each other. The administrative and operational expenses pertaining to FSDPSF will be settled regularly with OCR and the other funds. Grant programs may be combined activities financed by special and trust funds. ADB will charge a service fee to cover ADB’s incremental cost for the administration, management, supervision, and operation of the FSDPSF. The service fees are set at (i) 5% of amounts disbursed for TA projects; and (ii) 5% of amounts disbursed for grant components of investment projects up to $5,000,000, or 2% of amounts disbursed for grant components of investment projects above $5,000,000 with a minimum of $250,000, whichever is greater.

NOTE E—UNDISBURSED COMMITMENTS

Undisbursed commitments are denominated in US 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

In May 2013, the Board of Governors approved the transfer of $2,700,000 to the FSDPSF as part of OCR’s 2012 net income allocation.

In October 2013, the Government of Luxembourg committed its 1st contribution amounting to $2,400,000.

In November 2013, the Government of Luxembourg committed an additional contribution amounting to €1,500,000 ($2,037,000 equivalent). As at 31 December 2013, the amount committed was reported in the Statement of Financial Position as DUE FROM CONTRIBUTORS.

Uncommitted balances comprise amounts which have not been committed by ADB as of 31 December 2013.

240

FSDPSF-4

continued

NOTE G—OTHER FAIR VALUE DISCLOSURES

As of 31 December 2013, FSDPSF has no assets or liabilities measured at fair value on a non-recurring basis. See Notes C and E for discussions relating to investments and undisbursed commitments, respectively. In all other cases, the carrying amount of FSDPSF’s assets and liabilities is considered to approximate fair value.

NOTE H—SUBSEQUENT EVENTS

ADB has evaluated subsequent events after 31 December 2013 through 12 March 2014, the date these Financial Statements are available for issuance. On 6 January 2014, FSDPSF received the additional contribution from the Government of Luxembourg.